The US Dollar Index (DXY) slipped to about 99.10 after failing to hold above 99.35. It moved lower as markets reacted to rising expectations of a US-Iran deal.
President Donald Trump said the US is in the “final stages” of reaching an agreement with Iran. Oil prices fell during Wednesday’s correction, which fed through to US rates.
Dollar Pullback On Geopolitical Expectations
The 10-year US Treasury yield gave up earlier gains and was flat near 4.58%. Yields had risen over the past two weeks as traders priced in no Federal Reserve rate cuts this year, linked to higher oil prices.
Markets are waiting for the preliminary US S&P Global PMI data for May, due at 13:45 GMT. The report may affect short-term moves in the dollar and yields.
In technical terms, DXY remains above the 20-day EMA at 98.75. The RSI is 57.62, suggesting upward momentum without being overbought.
Support is seen at 98.75, with a break pointing towards 98.00. Resistance includes 99.47, the May 20 high, and a move above it could open a test of 100.00.
Derivatives Traders And Volatility Risks
We are seeing a familiar pattern as the US Dollar Index reacts to geopolitical headlines, pulling back from recent highs. This is reminiscent of the volatility we tracked back in 2025, when optimism over a potential US-Iran deal caused the DXY to abruptly reverse from the 99.50 resistance level. Although the index is trading at a different level today, the underlying principle that geopolitical news can override technical trends remains a key lesson.
This sudden increase in uncertainty means derivative traders should be prepared for bigger price swings in the coming weeks. The Cboe Volatility Index (VIX) has already climbed over 15% this past week to 14.8, reflecting growing market anxiety. This environment suggests that buying options, like straddles or strangles on major currency pairs, could be a prudent way to capitalize on rising volatility, regardless of the direction the dollar ultimately takes.
The connection between the dollar and US Treasury yields is as important now as it was then. In the 2025 scenario, yields fell to around 4.58%, weighing on the dollar, and we see a similar dynamic as the 10-year yield has now dipped below 4.50% for the first time in three months. According to the CME FedWatch Tool, the market has consequently priced out the probability of another Federal Reserve rate hike this year, a significant shift from just two weeks ago.
From a technical standpoint, the Dollar Index is currently testing crucial support near its 50-day moving average of 105.20. A firm break below this level could open the door for a deeper correction towards the 104.00 mark. Traders could look at buying put options or establishing bear put spreads to hedge against or profit from a potential downturn.
We must also watch the relationship between the dollar and energy prices, which was a major factor in the 2025 reversal. With WTI crude oil prices having fallen 8% this month to around $75 per barrel, downward pressure on inflation expectations is increasing. Historically, periods of rapidly falling oil prices have often correlated with short-term dollar weakness, a factor that should be included in any trading models.
