US Dollar Index Stabilizes Above 97.50 as Geopolitical Tensions Drive Safe-Haven Demand

The US Dollar Index (DXY) has regained strength, climbing to around 97.80 during Tuesday’s early Asian trading session, following geopolitical tensions and persistent inflation risks. Despite growing expectations of interest rate cuts by the US Federal Reserve (Fed), the US Dollar is buoyed by safe-haven flows amid the ongoing conflict in Ukraine. Traders are now eyeing the upcoming US ISM Manufacturing PMI data for August, which will provide further direction for the greenback.

Geopolitical Tensions and Safe-Haven Flows Support US Dollar

The DXY rebounded from its lowest level since July 28, driven by mounting geopolitical uncertainties. Recent reports of Russian drone attacks targeting Ukraine’s power infrastructure have left tens of thousands without electricity. As Russia and Ukraine continue to escalate their conflict, investors are flocking to the US Dollar, which is considered a safe haven during times of geopolitical instability.

Despite these tailwinds, speculation about the Fed’s future rate path may limit the USD’s upside potential. According to the CME FedWatch Tool, market participants are now pricing in an 89% chance of a 25 basis point rate cut by the Fed in September, an increase from the previous 85% probability.

Expectations of Fed Rate Cuts Weigh on US Dollar

While the geopolitical tensions are boosting the greenback in the short term, the rising odds of a Fed rate cut are putting a cap on its potential for further gains. Traders are increasingly expecting the Federal Reserve to ease its monetary policy to support economic growth, especially following recent data that has shown a slowdown in key economic indicators.

The US PCE Price Index has indicated persistent inflationary pressures, fueling expectations of a rate cut, while the US August employment report will be a key focus for investors looking for further clues on the Fed’s next move. The report, due to be released later this week, is expected to show 75,000 job additions, with the unemployment rate projected to rise slightly to 4.3%.

What’s Next for USD?

As geopolitical risks continue to support the USD, the key focus will be the US ISM Manufacturing PMI and upcoming labor market data. Any unexpected surprises in these reports could influence Fed rate cut expectations and lead to significant moves in the USD/JPY, EUR/USD, and other major currency pairs.

With global tensions and domestic economic data in play, the USD may remain resilient in the near term, but investors will likely stay cautious as they await the next signals from the Federal Reserve.

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