Interest Rate Hike Speculation Limits Dollar's Decline
The US dollar index (DXY) fell slightly on Tuesday (June 2), pressured by easing geopolitical tensions after Israel and Hezbollah agreed to halt attacks and President Donald Trump's signal that the US and Iran could eventually reach a deal. However, the dollar's decline was considered limited because market participants still believed that the Federal Reserve's next policy move would be an interest rate hike.
Charalampos Pissouros of XM assessed that the still-high geopolitical uncertainty was making the market reluctant to reduce bets on policy tightening. Even if there is further progress towards resolving the conflict, he expects inflation to remain high for some time, thus maintaining the high interest rate narrative for longer.
From a market pricing perspective, LSEG data shows that market participants still project the Fed will raise interest rates no later than March 2027. This perception is a major barrier to dollar weakness, despite improved risk sentiment.
In recent trading, the DXY fell 0.1% to 99.101. This limited movement reflects the tug-of-war between improving geopolitical sentiment and the US interest rate path, which is still seen as tilted tight.
Going forward, the dollar's direction will be sensitive to two main factors: whether geopolitical de-escalation actually continues, and whether US inflation and activity data are strong enough to keep tightening expectations alive. As long as the market remains convinced that inflation risks have not abated, the dollar's room for weakness is likely to be contained.
Source: Newsmaker.id
