DXY Holds Above 101.50 as Traders Await FOMC Amid Iran Tensions

The US Dollar Index (DXY) remains near an over one-month high, touched on Tuesday, as traders await the outcome of a two-day FOMC meeting due later this Wednesday. The index has been consolidating below the 101.50 level during the Asian session.

The geopolitical uncertainty in the Middle East continues to fuel concerns about a fresh escalation of tensions and prompts traders to price in the risk premium for the safe-haven US Dollar (USD). On Tuesday, Iran's Islamic Revolutionary Guard Corps launched a surprise attack on US forces with multiple ballistic missiles.

President Donald Trump warned that the US will return to strong military action against Iran if diplomatic efforts do not bring a rapid resolution to the crisis. This has revived inflation fears and raised prospects for an interest rate hike by the US Federal Reserve (Fed). However, economists at DBS highlight that investors remain 'highly cautious' about the upcoming FOMC meeting.

The market is still assigning 34% odds that the Fed would hike this week and close to 100% odds for the meeting in September. This underscores persistent expectations that the Fed will resume tightening even as near-term geopolitical risk premia in oil have partially unwound.