Dollar Index tests 100 as Middle East tensions fuel safe-haven bid

The US Dollar Index climbed toward the 100 level Wednesday as a 4 percent oil rally and escalating Middle East tensions drove safe-haven flows into the greenback, lifting it against the euro, pound and yen.

The index is testing resistance at 99.85 to 100.00, and a break above that zone would open the way toward the 50-day moving average at 100.35, according to FX Empire's technical analysis. Initial jobless claims came in at 199,000, below the 202,000 consensus, while oil jumped 4 percent after Houthi attacks on Saudi-backed forces in Yemen. The 2-year Treasury yield settled near 4.25 percent and the 10-year yield climbed above 4.67 percent, widening the dollar's yield advantage over major peers.

The dollar's strength pressures risk assets and emerging-market currencies, with the trajectory hinging on US inflation and employment data due in coming weeks and any de-escalation in the Middle East.

The geopolitical driver is the dominant force. Houthi attacks on Saudi-backed forces in Yemen have raised the specter of supply disruptions in a region that handles a large share of global oil trade, sending crude up 4 percent and reinforcing the dollar's appeal as a defensive asset. Any further escalation could extend the rally, while a diplomatic breakthrough would likely strip out the safe-haven premium.

EUR/USD pulled back as traders weighed disappointing Euro Area retail sales, which fell 0.3 percent month-over-month in June against a 0.1 percent gain forecast. The pair is attempting to settle below support at 1.1510 to 1.1525, with a break opening the way toward the 50-day moving average at 1.1479 and then support at 1.1420 to 1.1435. Germany's factory orders rose 3.1 percent, well above the 0.3 percent consensus, offering some offset.

GBP/USD remained stuck near resistance at 1.3465 to 1.3480 despite the oil-driven dollar bid. UK construction PMI improved to 44.7 in July from 38.4 in June, beating the 40 forecast. A successful test of that resistance would open the way toward 1.3550 to 1.3565, with the relative strength index in moderate territory leaving room for further upside.

USD/CAD gained ground as commodity-linked currencies came under pressure from the pullback in precious metals. The pair is trying to settle above the 50-day moving average at 1.4055, which would open the way toward resistance at 1.4125 to 1.4140.

USD/JPY moved higher as rising Treasury yields widened the rate gap with Japan, where the Bank of Japan maintains an ultra-dovish stance. The pair is attempting to settle above resistance at 157.50 to 158.00, with the next target at 159.50 to 160.00. Treasury Secretary Scott Bessent said a stable yen was important for the United States and the wider Asian region, adding that Washington remained in close contact with Tokyo.

The dollar's bid is reinforced by hawkish Federal Reserve expectations. The CME FedWatch tool shows traders pricing a lower probability of a rate cut at the next Federal Open Market Committee meeting than a month ago, as policymakers signal they need more progress on inflation before loosening policy. That repricing has lifted Treasury yields and boosted the dollar's appeal relative to currencies whose central banks remain dovish.

The last time the dollar index broke above the 100 level in this cycle, it preceded a sustained rally that pressured emerging-market currencies and commodities over the following weeks. A stronger greenback also typically weighs on crypto and DeFi risk assets, dampening token prices and fundraising activity, while pressuring gold and other dollar-denominated commodities. Traders will watch US inflation and employment data in coming weeks, along with any diplomatic progress in the Middle East, for the next directional cue.

This article is for informational purposes only and does not constitute investment advice.