Soaring oil prices fueled expectations of a Federal Reserve rate hike, causing the US dollar index to strengthen significantly.
2026-03-03 23:47:04
On Tuesday (March 3), the US dollar index rose sharply for the second consecutive trading day. A key shift in investor sentiment following the outbreak of the US-Iran conflict over the weekend is the core driver of this round of dollar gains.
In short: On Saturday, the US and Israel attacked Iran. The market had anticipated the attack, but had not fully priced in the specific timing. This event has been supporting oil prices for months. As the war officially began, Iran's retaliatory actions further pressured oil prices, pushing them higher. This retaliatory action may also be pushing up the US dollar and influencing the price movements of gold and other currencies.
Why high oil prices have become a catalyst for the rise of the US dollar.
A short-term rise in oil prices is acceptable, but a sustained high level is not.
Iran not only confronted the United States in response to the initial attacks but also launched missiles at neighboring countries in an attempt to strike oil refining facilities. Perhaps they wanted to provoke OPEC and pressure the US to stop the conflict—this is uncertain. But what is certain is that damaged facilities will be unable to produce oil, meaning there is a risk of disruption to crude oil supplies.
The market was already prepared for the closure of the Strait of Hormuz. This crucial shipping lane is the only route for oil tankers transporting crude oil to Europe and Asia, handling approximately 20% of global oil production. The strait can be opened or closed at any time depending on Iran's defense posture. According to Iranian media reports, the strait has already been closed. And since damaged infrastructure often takes months to repair, this means the world may face a longer-than-expected crude oil shortage.
Inflation concerns reignite, Federal Reserve back in focus
This is precisely the logic behind the strengthening of the US dollar:
High oil prices have an inflationary effect, and global markets may not be prepared for this, especially given the European Central Bank's commitment to maintaining a low-interest-rate environment. Meanwhile, the Federal Reserve has remained hesitant about cutting interest rates. The market had initially expected at least two rate cuts this year, but the Fed has consistently emphasized its data-dependent approach.
This Friday's non-farm payrolls report may influence the direction of the Federal Reserve's decision-making, but if inflation jumps sharply, it will force the Fed to keep interest rates unchanged, or even turn to raising rates.
It is inflation and expectations of interest rate hikes that are driving the dollar higher. The longer oil prices remain high, the greater the probability of a Federal Reserve rate hike, which is a huge negative for dollar bears who had previously heavily bet on a Fed rate cut.
If the situation in the Middle East eases, the US dollar may fall rapidly; however, if the situation continues to deteriorate, the US dollar index is expected to rise another 10% from its current level.
Technical Outlook: New Support Levels, New Target Levels
(US Dollar Index Daily Chart Source: FX678)
From the daily chart, the main trend of the US dollar index is upward.
This round of rapid gains, lasting two consecutive days, began on Monday with a breakout above the 50-day moving average (97.919), and further expanded today after breaking through the 200-day moving average (98.353). These moving averages have now become support levels.
Furthermore, after breaking through the previous swing high of 98.078, the indicator confirmed a bullish trend.
The next target levels are the previous swing highs: 99.492 and 100.395.
From a fundamental perspective: if high oil prices increase the probability that the Federal Reserve will hold rates steady or even raise rates in June, the US dollar will continue to strengthen.
From a technical perspective: As long as the US dollar index holds above the 50-day and 200-day moving averages, it will maintain a bullish trend.
In short: On Saturday, the US and Israel attacked Iran. The market had anticipated the attack, but had not fully priced in the specific timing. This event has been supporting oil prices for months. As the war officially began, Iran's retaliatory actions further pressured oil prices, pushing them higher. This retaliatory action may also be pushing up the US dollar and influencing the price movements of gold and other currencies.
Why high oil prices have become a catalyst for the rise of the US dollar.
A short-term rise in oil prices is acceptable, but a sustained high level is not.
Iran not only confronted the United States in response to the initial attacks but also launched missiles at neighboring countries in an attempt to strike oil refining facilities. Perhaps they wanted to provoke OPEC and pressure the US to stop the conflict—this is uncertain. But what is certain is that damaged facilities will be unable to produce oil, meaning there is a risk of disruption to crude oil supplies.
The market was already prepared for the closure of the Strait of Hormuz. This crucial shipping lane is the only route for oil tankers transporting crude oil to Europe and Asia, handling approximately 20% of global oil production. The strait can be opened or closed at any time depending on Iran's defense posture. According to Iranian media reports, the strait has already been closed. And since damaged infrastructure often takes months to repair, this means the world may face a longer-than-expected crude oil shortage.
Inflation concerns reignite, Federal Reserve back in focus
This is precisely the logic behind the strengthening of the US dollar:
High oil prices have an inflationary effect, and global markets may not be prepared for this, especially given the European Central Bank's commitment to maintaining a low-interest-rate environment. Meanwhile, the Federal Reserve has remained hesitant about cutting interest rates. The market had initially expected at least two rate cuts this year, but the Fed has consistently emphasized its data-dependent approach.
This Friday's non-farm payrolls report may influence the direction of the Federal Reserve's decision-making, but if inflation jumps sharply, it will force the Fed to keep interest rates unchanged, or even turn to raising rates.
It is inflation and expectations of interest rate hikes that are driving the dollar higher. The longer oil prices remain high, the greater the probability of a Federal Reserve rate hike, which is a huge negative for dollar bears who had previously heavily bet on a Fed rate cut.
If the situation in the Middle East eases, the US dollar may fall rapidly; however, if the situation continues to deteriorate, the US dollar index is expected to rise another 10% from its current level.
Technical Outlook: New Support Levels, New Target Levels
(US Dollar Index Daily Chart Source: FX678)
From the daily chart, the main trend of the US dollar index is upward.
This round of rapid gains, lasting two consecutive days, began on Monday with a breakout above the 50-day moving average (97.919), and further expanded today after breaking through the 200-day moving average (98.353). These moving averages have now become support levels.
Furthermore, after breaking through the previous swing high of 98.078, the indicator confirmed a bullish trend.
The next target levels are the previous swing highs: 99.492 and 100.395.
From a fundamental perspective: if high oil prices increase the probability that the Federal Reserve will hold rates steady or even raise rates in June, the US dollar will continue to strengthen.
From a technical perspective: As long as the US dollar index holds above the 50-day and 200-day moving averages, it will maintain a bullish trend.
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