US Dollar Index strengthens as a safe-haven asset after Iran reportedly fired missiles at commercial ships.
Cooling jobs and business growth curb the Greenback's rise, as traders drop expectations for Fed interest rate hikes.
The June ISM Services PMI eased to 54.0 from 54.5, signaling slightly slower growth in the services sector.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding gains after two successive flat days and trading around 100.90 during the European hours on Tuesday. The Greenback received support from safe-haven demand amid renewed geopolitical tensions.
Strait of Hormuz tensions emerged after reports that Iran fired at least two missiles at commercial vessels transiting the strategic waterway late Monday. While two ships sustained significant damage, no casualties were reported. Separately, the UK Maritime Trade Operations (UKMTO) confirmed that a southbound tanker was struck on its port side by an unknown projectile, which ignited a fire on board.
However, the upside of the Greenback could be restrained as traders price out any Federal Reserve rate hikes this month and in September. This shift in sentiment followed a cooling employment report that revealed fewer jobs added across April, May, and June than Wall Street had anticipated.
Additionally, business activity in the US service sector cooled slightly; it remained firmly in expansionary territory, with the June ISM Services Purchasing Managers’ Index (PMI) easing to 54.0 from 54.5, as expected, in line with consensus estimates. Within the sub-components of the report, the Prices Index dipped from 71.3 to 67.7, while the Employment Index saw a notable improvement, climbing out of contractionary territory from 47.9 to 51.2.
The Greenback could find baseline support from hawkish remarks by Federal Reserve (Fed) Governor Christopher Waller and resilient domestic economic data.
Waller underscores forward guidance limits while reaffirming Fed’s inflation resolve
Fed’s Waller delivers a moderately more impactful speech than usual, with a 7.1/10 FXS Speechtracker score compared to the established baseline of 6.4/10, focused on the nuanced role of forward guidance. The emphasis that forward guidance can both accelerate policy transmission and become a hindrance when too rigid or used amid highly uncertain outcomes signals a preference for flexibility and data dependence rather than pre-commitment. Later remarks reaffirm the credibility of the 2% inflation pledge, reject using low rates to ease U.S. deficit financing, and highlight shifting risks as inflation “taking off” and a stabilized labor market alter the policy calculus, all of which lean modestly hawkish for the Dollar.
The FXS Fed Sentiment Index rises by 1.83 points to 125.72, reinforcing a clear hawkish stance well above the neutral 100 threshold. The combination of a stronger-than-baseline FXS Speechtracker score and an index level firmly in hawkish territory suggests markets will continue to price a vigilant Fed reaction function, supportive of the Dollar against the Euro and Yen.
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