The US Dollar Index (DXY) slipped on Monday as markets weighed shifting developments in the Middle East. The gauge was around 99.95 after earlier reaching 100.21, its highest since April 6, following a post-NFP extension of the Dollar’s recent advance alongside weekend Iran–Israel hostilities. The move later unwound after Iran’s Fars News Agency said Tehran had ended its military operations against Israel, tempering the immediate bid for safe-haven assets.
Talk of continued negotiations between Washington and Tehran kept the picture uncertain, and expectations of a hawkish Federal Reserve (Fed) also underpinned the Greenback, with the CME FedWatch Tool still pointing to rates being held steady in the near term while leaving scope for a year-end hike. Attention now turns to US inflation data, with the annual Consumer Price Index (CPI) seen rising to 4.2% in May from 3.8% previously as energy costs feed through. Separately, the New York Fed’s Survey of Consumer Expectations (SCE) showed longer-run expectations unchanged at 3.1% for three years ahead and 3.0% for five years ahead.
Dollar Maintains Strength Amid Labor Data and Geopolitical Risks
We see the US Dollar Index holding firm around 105.50 as the week begins, showing underlying strength in the Greenback. The robust May Nonfarm Payrolls report released last Friday, which showed the economy added 263,000 jobs against a forecast of 185,000, continues to fuel this momentum. This strong labor market data strengthens the argument for the Federal Reserve to maintain its restrictive policy stance.
The dollar is also benefiting from a subtle but persistent safe-haven bid stemming from ongoing global supply chain adjustments and geopolitical trade friction. Unlike the sharp, event-driven rallies of the past, this creates a more stable floor for the dollar, cushioning it against significant dips. Consequently, we are looking for opportunities where dollar weakness appears limited in the near term.
Fed Policy Expectations and Upcoming Inflation Data
Based on current market pricing, derivatives traders are not expecting any immediate policy changes from the Fed. The CME FedWatch Tool indicates a greater than 90% probability of rates remaining unchanged at the next meeting. However, we have seen the odds of a final rate hike by the end of 2026 rise to over 35%, which should keep dollar-buying interest alive on any pullbacks.
The main event for traders this week will be the upcoming Consumer Price Index (CPI) report. Current forecasts suggest a slight increase in the annual inflation rate to 3.6% from 3.4% previously, largely due to a recent uptick in energy prices. A higher-than-expected inflation print would likely force the market to price in more Fed hawkishness, pushing the dollar higher still.
While near-term inflation remains a concern, we also note that longer-term inflation expectations are staying relatively contained. The latest University of Michigan survey showed five-year inflation expectations holding at 2.9%, which suggests confidence in the Fed’s long-term credibility. For derivative traders, this means that while the immediate reaction to data will be sharp, the dollar’s upward trajectory is not without potential headwinds.
