US Dollar Weakens Below 98 as Geopolitical Risks Ease and Powell Maintains Policy Hold
The US dollar index (DXY) extended its recent downward trend on Wednesday, trading below 98 for the third consecutive session. The retreat reflects a confluence of softening haven demand due to tentative geopolitical calm in the Middle East, cautious Federal Reserve commentary, and a recalibration of monetary policy expectations. As global markets recalibrate around the Israel-Iran ceasefire and a data-dependent Fed, the dollar’s weakening underscores an inflection point for risk sentiment, commodity flows, and broader financial positioning.
Easing Geopolitical Risk Dampens Dollar Demand
The US-brokered ceasefire between Israel and Iran remains intact despite sporadic flare-ups, including localized missile fire. While tensions persist, the absence of full-scale retaliation or escalation has reduced investor appetite for safe-haven assets, including the greenback. Oil prices—closely linked to Middle Eastern conflict dynamics—have fallen sharply from their recent highs, further signaling relief in energy-sensitive risk hedges.
However, uncertainty remains high. US intelligence leaks suggest that Washington’s recent missile strikes caused only partial damage to Iranian nuclear infrastructure, specifically failing to fully disable centrifuge operations in Fordow and Natanz. According to reports sourced from the International Atomic Energy Agency (IAEA), this has delayed but not dismantled Tehran’s nuclear capabilities—keeping geopolitical risk simmering just below the surface.
Fed Signals Steady Policy Amid Tariff Caution
Meanwhile, Federal Reserve Chair Jerome Powell reiterated a cautious, data-dependent stance in his latest remarks. Speaking at a financial policy event, Powell reaffirmed the Fed’s “unwavering commitment” to curbing inflation but highlighted the uncertainty surrounding new US tariff policies. He signaled that interest rates would likely remain unchanged in the short term until the inflationary impact of the Biden administration’s recently proposed tariffs on Chinese electric vehicles and critical minerals becomes clearer.
Importantly, Powell’s stance reflects growing concern within the Fed that trade policy may introduce exogenous price pressures, complicating the central bank’s disinflation strategy. While core inflation has shown signs of easing—falling to 2.8% on a 3-month annualized basis in May 2025—headline CPI remains sticky at 3.3%, still above the Fed’s 2% target.
Rate Cut Bets Persist Despite Hawkish Rhetoric
Despite Powell’s steady tone, market pricing reflects a divergence from Fed communication. According to CME FedWatch data, futures markets now assign a 19.7% probability of a 25 basis point rate cut as early as July, with over 63 basis points of cuts priced in by December. This suggests that investors are increasingly confident that slowing growth and easing inflation—especially under deflationary external conditions—will push the Fed toward easing by Q3.
Some analysts, including those at Goldman Sachs and Nomura, argue that the Fed may be underestimating the speed of economic cooling, particularly in the face of weakening global manufacturing, soft real estate indicators, and consumer credit fatigue. June’s new home sales data, due later today, is expected to show a 4.5% month-over-month decline, adding to the perception of economic deceleration.
Dollar Outlook: Structural Weakness or Tactical Pullback?
The dollar’s decline below 98 marks its lowest level since February 2022, reigniting debates about the sustainability of dollar strength in a world of converging interest rates. As other central banks, including the ECB and Bank of England, enter dovish phases and commodity prices stabilize, the structural case for long-dollar positioning has weakened.
Furthermore, the relative improvement in risk appetite—reflected in rising equity indices and narrowing credit spreads—suggests that investors are shifting into higher-yielding, risk-on assets, including emerging market bonds and equities. This rotation inherently reduces demand for the USD as a global reserve and transactional currency.
That said, lingering geopolitical risks, persistent US services inflation, and the dollar’s entrenched role in global finance may provide a floor under current levels.
Key Takeaways:
Dollar Index fell below 98 for the third straight session, approaching 16-month lows.
Ceasefire between Israel and Iran is holding, reducing haven flows, but partial damage to Iran’s nuclear program keeps tensions alive.
Fed Chair Powell signaled no near-term rate cuts, citing inflation vigilance and tariff uncertainty.
Markets price a 20% chance of July cut, with 63bps of easing expected by year-end.
Traders await Powell’s Senate testimony and new home sales data later today.
Sources:
Federal Reserve Board (2025) Chair Powell’s Monetary Policy Remarks, June 2025
CME Group (2025) FedWatch Tool – Rate Probabilities as of June 25
IAEA (2025) Preliminary Site Assessment – Fordow and Natanz Facilities
Bloomberg Terminal Data (Accessed 25 June 2025)
Reuters (2025) Dollar Slips, Powell Holds Rates Amid Tariff Uncertainty
US Census Bureau (2025) New Residential Sales Forecast – June Preliminary Estimates