U.S. Dollar Index Falls Below the 100 Level
N.R. Finch
The dollar index fell to 99.903 as a fresh U.S. strike on Iran collided with May CPI hitting 4.2% — markets have swung from pricing two rate cuts this year to fully pricing in a December hike.
How did markets flip from cuts to a hike?
Before the Iran war broke out in February, traders expected two rate cuts this year. Now a 25-basis-point hike in December is fully priced in.
This means → in under six months the market's read on the Fed did a complete U-turn — from "the economy is slowing, cut rates" to "war plus inflation, maybe hike."
In plain terms = same Fed, but the market's bet on what it will do has reversed entirely.
CPI at 4.2% — is inflation really out of control?
May headline CPI hit 4.2% year-on-year, the highest since April 2023. The number looks alarming.
But core CPI rose just 0.2% month-on-month, down from 0.4% in April — strip out energy and food, and price growth is actually slowing.
ING chief international economist James Knightley noted that labor is the biggest cost for U.S. firms, and wage growth keeps decelerating, helping to cap core inflation.
This means → hot on the surface, stable underneath. Knightley's call: "no cut, but no hike either" — and the gap between that view and the market's hike pricing is the core tension driving the dollar right now.
Another strike on Iran — why isn't the market panicking?
The latest U.S. strike pushed Brent crude up over 2% to $95.40 a barrel, but the FX reaction was noticeably weaker than before.
ATFX analyst Nick Twidale: "A few weeks ago the same level of escalation might have pushed Brent back above $100 and driven a sharp dollar rally."
This reflects "headline fatigue" — the same shock repeated, each reaction smaller than the last.
The real unresolved question: is this conflict the new normal, or another round of escalation designed to bring peace talks back to the table? The answer determines whether the risk premium can keep narrowing.
How are other major currencies pricing this chaos?
Euro at $1.1553, slightly off a 10-week low but having given back most gains since the April ceasefire deal; the ECB meets today, and markets expect a hike.
Yen at 160.52, with markets on alert for Japanese intervention. BOJ Governor Kazuo Ueda is hospitalized and will miss next week's meeting, but CBA strategist Carol Kong says his absence won't change the policy decision — a 25-bp hike is still expected.
Aussie dollar at $0.7006, touching a 9-week low in early trade; Kiwi at $0.5797.
What to watch next?
Two key checkpoints: ① whether the Fed actually moves toward a hike; ② whether the Middle East sees meaningful de-escalation.
This means → the FX market is sitting in a low-volatility equilibrium — not because risk is absent, but because two forces are canceling each other out.
A clear signal in either direction will break that balance.
Content is for reference only, not financial advice.