Dollar extends gains as Iran tensions and Fed hike bets mount

The US Dollar Index extended gains for a second consecutive session on Tuesday, trading around 100.00 as investors sought refuge in the greenback amid escalating US-Iran tensions and rising expectations that the Federal Reserve will raise interest rates in September.fxstreet+1

Geopolitical Tensions Fuel Safe-Haven Demand

The dollar's advance accelerated after President Donald Trump characterized his recent diplomatic proposal to Iran as a "last chance" for resolution, following his decision to call off a major military strike. Trump signaled expectations that formal negotiations would begin to address the Strait of Hormuz and Iran's nuclear program.fxstreet

Iran swiftly rejected the overture. General Mohsen Rezaei, an advisor to Iran's Supreme Leader, dismissed the conditions, declaring that Tehran would "absolutely not allow a second corridor in the Strait" and warning that any foreign warships deployed to enforce such a corridor would be "targeted directly."fxstreet

The EUR/USD pair weakened as investors rotated out of the euro and into traditional safe havens. The euro's sensitivity to geopolitical shocks that could impact energy prices and trade flows, given Europe's reliance on imported energy, has made it particularly vulnerable to Middle East escalation.bitcoinworld

Rate Hike Expectations Build

Markets are pricing in roughly a 65% probability of a 25-basis-point rate hike at the Fed's September meeting, according to the CME FedWatch tool, after the central bank voted 9-3 to hold rates steady at 3.5%-3.75% at its July meeting. The three dissenting votes in favor of an immediate hike have added to the hawkish tilt in market expectations.schwab+1

New York Fed President Williams reinforced the hawkish tone, expressing confidence that current policy is "well positioned" to achieve the 2% inflation goal while reiterating the Fed's commitment to act if inflation does not stay on track.fxstreet

Structural Tailwinds Support the Greenback

Beyond geopolitics and monetary policy, analysts point to structural factors underpinning the dollar's rally. Julius Baer revised its near-term dollar outlook upward, citing AI-driven capital inflows into US equities, widening interest rate differentials, and a narrowing US current account deficit driven by higher energy exports and softer consumer demand.gdnonline

Standard Chartered analysts noted that while recent equity-market weakness and higher long-term rates have tightened financial conditions, "these moves were moderate compared to the financial-market rallies of the past few months," suggesting earlier gains in risk assets continue to provide an offset.fxstreet

The British pound slipped against the dollar despite finding some support from a smooth political transition in London, as persistent rate differentials continued to favor the greenback.gdnonline