The US dollar extended its rise for a third session on Wednesday, lifting the US Dollar Index (DXY) towards two-month highs near 99.50 and keeping 100.00 in view. Support has come from uncertainty tied to the Middle East and ongoing policy noise from the White House, while markets have also repriced the Federal Reserve’s policy outlook for 2025. Higher crude oil prices linked to the US-Iran-Hormuz conflict have added to inflation expectations, reinforcing the case for a restrictive stance for longer. New York Fed President John Williams said inflation has risen “quite a bit” and described the labour market as healthy, while pointing to upside inflation risks even as he expects energy costs to ease.
Fresh data also underpinned the move: ADP reported 122K private-sector jobs added in May, and the ISM Services PMI rose to 54.5. Within that survey, the Prices Paid Index climbed to 71.3, the highest since August 2022. DXY was last at 99.52, holding above the 55-day, 100-day and 200-day SMAs just under 99.00; RSI is around 60 and ADX near 18. Resistance sits at 100.39, then 100.64 and 101.98, while support is at 99.50, the 55-day SMA near 98.95, the 100-day SMA at 98.56 alongside the 200-day SMA at 98.60, then 97.62 and the mid-95.00s.
Drivers Of Ongoing Dollar Strength
The US Dollar Index (DXY) is showing sustained strength, currently trading around 105.20 and looking poised to test the 106.00 level. We believe this upward momentum will continue in the coming weeks. This outlook is based on a mix of persistent inflation and geopolitical factors that favor the greenback.
Renewed tensions in Eastern Europe are causing a spike in energy prices, which directly feeds into inflation concerns. This reinforces our view that the Federal Reserve will be forced to keep interest rates elevated for longer than the market anticipates. In fact, comments from Minneapolis Fed President Neel Kashkari last week suggested the central bank must remain vigilant against price pressures, signaling a delay in any potential rate cuts.
Recent data confirms that inflation is proving sticky, with the latest Consumer Price Index (CPI) report showing a 3.6% year-over-year increase, surprising analysts who had forecast a cooler number. This situation is reminiscent of the 2022-2023 period, where markets consistently underestimated the Fed’s resolve to fight inflation. We see this dynamic playing out again, providing a strong tailwind for the dollar.
The narrative of US economic outperformance is also firmly back in place. The May jobs report, released last Friday, showed the economy added a solid 215,000 jobs, crushing expectations and holding the unemployment rate at a historically low 3.8%. This contrasts sharply with slowing growth in the Eurozone, where recent PMI data indicates economic contraction.
Trading Strategies For A Stronger Dollar
For our trading approach, we are positioning for further dollar strength against currencies like the Euro and Yen. We are buying call options on dollar-tracking ETFs like UUP to capture this expected upward move. Selling out-of-the-money puts is another strategy we are using to generate income while maintaining a bullish stance.
Given the potential for sharp moves around upcoming economic data releases, we also see an opportunity in volatility. Implied volatility on major currency pairs has been rising, and we expect this to continue. We are buying straddles on the EUR/USD pair to profit from a significant price swing in either direction, which also serves as a hedge against any unexpected policy surprises.
