Dollar index holds firm amid Middle East tensions and Fed outlook

The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, maintained its upward momentum for a second consecutive session, trading near 100.10 during Asian trading hours on Monday.

The Greenback found support from increased safe-haven demand following renewed geopolitical tensions in the Middle East.

The move came after the Israeli military reported that Israel’s aerial defence systems had intercepted a missile launched from Yemen towards Israeli territory.

Middle East Tensions lift demand for safe-haven assets

According to a report by The Guardian, air raid sirens sounded in Tel Aviv following the missile attack from Yemen.

The latest development has raised concerns about a renewed escalation of conflict in the region.

The retaliatory attacks from Yemen, whose military force, the Houthis, is backed by Iran, have heightened investor caution and increased demand for traditional safe-haven assets, including the US Dollar.

Market participants have closely monitored developments in the Middle East, with concerns growing that the conflict could have broader implications for global markets and commodity prices.

Strong US employment data strengthens dollar

The US Dollar also received support from stronger-than-expected US labour market data released on Friday.

Data showed that US Nonfarm Payrolls (NFP) increased by 172,000 jobs in May.

While this was slightly below the revised figure of 179,000 recorded in the previous month, the labour market remained resilient.

The previous reading had been revised upward from 115,000 jobs.

Meanwhile, the US unemployment rate remained unchanged at 4.3%, indicating continued stability in the employment market.

The stronger labour market data reinforced expectations that the Federal Reserve may maintain a tighter monetary policy stance in the coming months.

Fed outlook remains in focus

Traders broadly expect the Federal Reserve to keep interest rates unchanged at its June 16-17 policy meeting, which will be the first meeting under new Chairman Kevin Warsh.

However, expectations for future monetary tightening have gained traction following the latest employment figures.

At the same time, rising geopolitical tensions have pushed oil prices higher, prompting fresh concerns that inflationary pressures could re-emerge.

Higher energy prices are often viewed as a risk factor for inflation, making the Federal Reserve's future policy decisions a key focus for investors.

Indian rupee faces pressure amid global uncertainty

The Indian rupee weakened slightly against the US Dollar on Monday as investors reacted to both the strong US jobs report and escalating geopolitical tensions.

The USD/INR exchange rate was trading at 95.2900, easing modestly from its year-to-date high of 96.90.

Market sentiment towards the rupee remained cautious as investors assessed the impact of global developments on emerging market currencies.

Goldman Sachs sees stability ahead for the rupee

Analysts at Goldman Sachs said the Indian rupee could be nearing a period of stabilisation against the US Dollar.

In a note to investors, the bank stated that measures taken by the Indian government and the Reserve Bank of India (RBI) may help offset additional weakness in the currency.

Goldman Sachs expects the USD/INR pair to remain within a relatively narrow trading range in the near term, potentially ending the prolonged period during which the pair climbed to record highs earlier this year.

Despite the more constructive outlook, the bank highlighted several risks that could weigh on the rupee.

Among them is the possibility that the Middle East crisis may persist, particularly after talks between the United States and Iran reportedly stalled.

With geopolitical uncertainties continuing and monetary policy expectations evolving, investors are expected to remain focused on developments that could influence both the US Dollar and the Indian rupee in the weeks ahead.