The US Dollar traded slightly higher in early European trading on Friday, with the US Dollar Index (DXY) near 99.25. Reports said the Iranian Labour News Agency stated a final US–Iran draft had been reached with Pakistan’s mediation, and that a deal could be announced within hours. The report listed provisions including an immediate ceasefire on all fronts, guaranteed freedom of navigation in the Gulf and the Strait of Hormuz, and talks on remaining issues within a week. Iranian officials said uranium enrichment and control over the Strait of Hormuz remained sticking points, while US President Donald Trump has described these as non-negotiable. Traders expect the Federal Reserve to keep rates unchanged and deliver at least one rate rise this year.
On technical measures, DXY held above the 20-period EMA at 98.79, while the RSI struggled to move above 60.00. Support is seen near 98.79; a break below could open 98.00. Resistance is at 99.52, with scope towards 100.00 if that level is cleared. The US Dollar accounts for over 88% of global foreign exchange turnover, or about $6.6 trillion per day (2022). The Fed targets inflation at 2% and can also use quantitative easing or quantitative tightening.
Geopolitical Tensions and Dollar Strength
A year ago, we saw the US Dollar Index hovering around 99.25, with market chatter focused on a potential US-Iran deal that never fully materialized. That optimism proved temporary, as persistent disagreements on key issues left geopolitical tensions simmering. This background risk has provided a steady, underlying support for the dollar as a safe-haven asset over the past twelve months.
Looking back at Federal Reserve expectations in May 2025, the market was pricing in at least one more rate hike for that year, a forecast that proved accurate. The Fed continued its tightening cycle through the end of 2025 to combat inflation that was slow to return to its 2% target. As of our latest data this month, the Consumer Price Index (CPI) is still elevated at 3.1% year-over-year, complicating the Fed’s next move.
Fed Policy Outlook and Trading Strategies
This has pushed the Dollar Index significantly higher, as we now see it trading firmly around 104.50. The interest rate differential between the US and other major economies like Europe and Japan remains wide, attracting capital flows into the dollar. The strength we observed starting from below the 99.00 level has clearly followed through over the past year.
Given the Fed is now signaling a data-dependent pause, uncertainty is the main theme, creating opportunities in derivatives. We should consider buying options to trade the potential for increased volatility in major pairs like EUR/USD. The market seems to be underpricing the chance of a sharp move if upcoming employment or inflation data surprises significantly.
For those with a more directional view, a strategy using futures contracts could be beneficial. If we believe that sticky inflation will force the Fed to maintain a hawkish stance longer than others expect, maintaining long positions in US Dollar Index futures is a logical play. This position benefits directly if interest rate expectations in the US remain higher for longer.
