US Dollar Index gains as US-Iran tensions escalate, Treasury yields rise

The US Dollar Index rebounds on Tuesday, erasing Monday's losses as hawkish Fed bets and rising yields drive demand.
Fresh US-Iran military strikes lift Oil prices and add a safe-haven bid to the Greenback, while intensifying inflation concerns.
Traders await US employment data later this week.

Vishal Chaturvedi FXStreet

The US Dollar Index (DXY) edges higher on Tuesday, reversing all of the previous day’s losses as hawkish Federal Reserve (Fed) expectations and rising US Treasury yields provide a strong tailwind. At the same time, fresh fighting between the United States (US) and Iran drives some safe-haven flows toward the Greenback. At the time of writing, DXY trades around 99.71, up roughly 0.30% on the day.

Reuters reported that the US military began striking Islamic Revolutionary Guard Corps (IRGC) targets inside Iran at 16:00 GMT on Tuesday. Iranian media reported explosions on Qeshm Island and in the southern cities of Bandar Abbas and Chabahar.

US President Donald Trump confirmed the operation in a Truth Social post, saying that the US was “striking Iranian targets near the Strait of Hormuz.” Trump warned that “if the failed Nation of Iran retaliates,” it would be “hit again at a much harder and higher level.”

Oil prices moved higher in reaction to the latest escalation, with West Texas Intermediate (WTI) climbing to its highest level since July 24 and trading around $88.70 per barrel. Higher energy prices add to inflation risks at a time when the Fed is already struggling to bring inflation sustainably back toward its 2% target.

Fed Chair Kevin Warsh’s tough rhetoric at the Jackson Hole Symposium revived expectations of an interest rate hike as soon as this month. Warsh warned that the central bank would have more work to do if policymakers were not confident that inflation was returning to target.

US Treasury yields rise as persistent inflation concerns and hawkish Fed expectations fuel bets on higher borrowing costs, with the benchmark 10-year yield trading around 4.80%, its highest level since January 2025.

According to the CME FedWatch Tool, traders see around a 68% probability that the US central bank will increase rates at its September 15-16 meeting, up from roughly 40% a week ago.

Softer US data provide little relief to Dollar bears

Softer-than-expected US economic data released on Tuesday briefly weighed on the Greenback but failed to generate sustained selling pressure. The ISM Manufacturing Purchasing Managers Index (PMI) fell to 54.6 in August from 55.6 in July, missing the market forecast of 55.2. JOLTS Job Openings rose to 7.271 million in July from 7.182 million but fell short of the 7.3 million forecast.

Attention now shifts to the ADP Employment Change report on Wednesday and the Nonfarm Payrolls (NFP) report on Friday. Strong employment figures could reinforce expectations of a September rate hike, while a weak report may challenge the Greenback’s advance.

Economic Indicator

ADP Employment Change

The ADP Employment Change is a gauge of employment in the private sector released by the largest payroll processor in the US, Automatic Data Processing Inc. It measures the change in the number of people privately employed in the US. Generally speaking, a rise in the indicator has positive implications for consumer spending and is stimulative of economic growth. So a high reading is traditionally seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

Traders often consider employment figures from ADP, America’s largest payrolls provider, report as the harbinger of the Bureau of Labor Statistics release on Nonfarm Payrolls (usually published two days later), because of the correlation between the two. The overlaying of both series is quite high, but on individual months, the discrepancy can be substantial. Another reason FX traders follow this report is the same as with the NFP – a persistent vigorous growth in employment figures increases inflationary pressures, and with it, the likelihood that the Fed will raise interest rates. Actual figures beating consensus tend to be USD bullish.

Author

Vishal Chaturvedi

FXStreet

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

AUD/USD flatlines near 0.6965 as less hawkish RBA counters USD weakness

AUD/USD holds steady above a two-week low, trading near 0.6965 in the Asian session on Wednesday as early midterm election results heighten political uncertainty and weigh heavily on the US Dollar. Moreover, reviving safe-haven demand triggers a fresh leg down in US bond yields, offsetting Fed hike bets and exerting additional pressure on the buck. However, a less hawkish RBA caps the Aussie.

USD/JPY declines below 158.00 as USD weakens on midterm election results

USD/JPY comes under heavy selling pressure on Wednesday, dropping below 158.00 during the Asian session as the US Dollar slumps to a one-month low amid heightened political uncertainty after early US midterm vote counts. Moreover, the prospect of gridlock in Washington drives safe-haven flows, triggering a fresh leg down in US bond yields and further weighing on the buck.

Gold reclaims $4,000 and above

Gold manages to regain some composure, leaving behind two consecutive daily pullbacks and reclaiming the area above the key $4,000 mark per troy ounce on Wednesday. The strong decline in the US Dollar, declining US Treasury yields and lower crude oil price all contributes to the yellow metal’s recovery.

Crypto Today: Bitcoin, Ethereum, XRP extend advance as US Dollar slides on Democrats' US midterm victory

Bitcoin trades above $78,000 on Wednesday as risk-on sentiment improves in the broader cryptocurrency market. Ethereum mirrors BTC’s recovery outlook, hovering above $2,300. Ripple similarly exchanges hands above $1.28, marking two consecutive days of gains.

US midterms 2026: Investor Q&A on the Democratic sweep

1. Gridlock replaces the stimulus narrative. A Democratic Congress would constrain Trump's ability to pursue additional fiscal expansion and legislative tax measures. But it cannot simply reverse the president's entire economic agenda. Executive powers, existing legislation and presidential vetoes remain important. 2. AI faces a higher hurdle, not an extinction event.

The 2% inflation target came from a throwaway remark. It now moves trillions

The Federal Reserve's 2% inflation goal grew out of an off-the-cuff remark by a New Zealand politician in 1988. Bond investors still price long-term US debt as if 2% holds, so a change in how the Fed measures inflation would move markets.