US Dollar Index eases from late July highs as profit-taking kicks in amid sliding yields

The US Dollar Index (DXY) experienced a slight decline after reaching a new high since late July earlier on Thursday. Despite this, the index remains above the 100.00 psychological level as it heads into the European trading session. Several factors support the emergence of dip-buyers at lower levels. Fed Chair Kevin Warsh's emphasis on inflation has helped calm the recent sell-off in the fixed-income market, leading to a slight reduction in US bond yields and prompting some US Dollar (USD) bulls to book profits.

Despite this, the Fed's hawkish stance and the escalating tensions in the Middle East act as tailwinds for the Greenback, helping to limit losses for the DXY. The Fed unanimously raised interest rates for the first time since 2020 at the end of the September policy meeting on Wednesday, with officials expecting one more increase this year.

This news, combined with concerns over oil-driven inflation, strengthens the case for further Fed tightening, which should continue to support the DXY. Danske Bank analysts note that the Fed delivered a 25bp rate hike with unanimous support, while the updated dots were slightly more hawkish than expected. Meanwhile, Iran-backed Houthi rebels have reported over 450 air strikes in Yemen in the past week, while US President Donald Trump claims that Iran may be looking to strike a deal, and the war may be nearing its end.

However, ongoing fighting between the Houthi group and Saudi Arabia keeps the geopolitical risk premium in play, further favoring DXY bulls. Traders are now looking ahead to the US economic calendar, which includes the release of the Philly Fed Manufacturing Index, Initial Weekly Jobless Claims, and housing market data later in the North American session.

Additionally, ongoing developments surrounding the Middle East crisis will influence USD price dynamics and present short-term opportunities amid a supportive fundamental backdrop.