DXY Dollar Index Falls Despite Recent Strength Amid Iran Deal Expectations
By the evening of May 25, the dollar index against a basket of six major currencies was around 98.9 points. The dollar's upward momentum slowed after reports of progress in negotiations.
Dollar Index Decline: Geopolitical Pause or End of the Dollar Rally?
The Essence: What's Really Happening
On the surface, the news looks like a simple geopolitical reaction: progress in US-Iran talks reduces demand for the dollar as a safe haven, and the DXY index sits at 98.9 by the evening of May 25. A convincing narrative for the news feed, but not for those looking at the bigger picture.
The non-obvious insight that mainstream media miss: the current dollar decline is not a "news-driven dip," but an illustration that the entire previous rise above 99 points was a speculative fear premium, not based on fundamentals. The index rose on escalation of the Middle East conflict—and fell just as quickly at the first signs of de-escalation. This is not a sign of a strong currency. It's a sign of a currency held only because "it's scary."
Key point: the 99-point level was never convincingly broken. DXY is now trading just below this mark, and technically it looks like a failed attempt to establish a new range. If 99 couldn't hold at the first easing of external pressure, talk of a "new dollar cycle" is premature.
Timeline and Context
On May 23, Donald Trump stated on his social media platform Truth Social that a deal with Iran is "largely agreed" and the parties are discussing final details. Markets, exhausted by three months of escalation in the Strait of Hormuz, took this as a signal to buy risk and sell the dollar. Brent crude crashed from $102 to $98 per barrel in just a few days.
But on May 24, a cooling-off followed: Trump wrote that the blockade of Iranian ships in Hormuz "will remain in full force until an agreement is reached, certified, and signed." And on May 25, Iranian Foreign Ministry spokesman Esmail Baghai stated: "We have reached agreement on most issues under discussion, but no one can claim this means a quick signing of the agreement."
Result: by the evening of May 25, the DXY index stood at 98.9 points, with the official dollar exchange rate from the Central Bank of the Russian Federation on May 26 at 71.55 rubles.
Meanwhile, US and UK markets were closed on May 25 due to holidays (Memorial Day in the US and a bank holiday in the UK). Liquidity was minimal, amplifying volatility even on small volumes. A 0.2% dollar decline in such conditions is not a "market move" but almost a technical correction in the absence of buyers.
Who Wins and Who Loses
Winners: importers and countries with dollar-denominated debt. For emerging markets, a weaker dollar means lower debt burdens. Turkey, Egypt, Pakistan—all get a breather. Gold also benefits: spot gold rose over 1% on May 25, exceeding $4,570 per ounce, on the back of a weaker dollar and easing inflation fears.
Losers: speculators who opened long dollar positions on escalation expectations. Their positions were built on fear. As soon as even a ghost of peace appeared, that fear began to melt. According to analyst estimates, a significant portion of DXY's rise from 98.15 to 98.86 in recent weeks was driven by short-covering and safe-haven demand, not changes in Fed rate expectations. Now those positions are being closed.
What the Media Aren't Saying
First: the dollar's weakening comes as the probability of a Fed rate hike by year-end is estimated at only 20–25%. New Fed Chair Kevin Warsh, who took office in May, is perceived by the market as a "hawk," but so far it's just talk. No actual policy tightening has occurred. The dollar gets no support from rates or economic growth. All it has is geopolitical fear. And fear is a poor foundation for a long-term rally.
Second: the technical level of 98.9 is the last line of defense for dollar bulls. One analytical review on May 25 directly stated: "A decline is expected only after the 98.90 level is broken. Potential selling target is 98.86." The index is now already around 98.9–99.0. If new positive signals on Iran emerge in the coming days, a break below 98.9 will become reality, and the dollar could fall to 98.0–98.5.
Third, the most non-obvious: the dollar's fall and oil's fall are two sides of the same coin, but their impact on inflation is divergent. A weaker dollar makes imports more expensive for the US, which could theoretically stoke inflation. But at the same time, oil is cheaper, which dampens the main inflation driver. The Fed finds itself in a paradoxical situation: the dollar weakens (bad for inflation), but oil cheapens (good). What the net effect will be—no one knows. It is this uncertainty that makes the market so nervous.
Forecast: Next 30 Days and 90 Days
30 days. The coming weeks will be determined by two factors: the verdict on Iran and US labor market data. If a real memorandum of understanding (even without a full agreement) emerges in June, the dollar could fall to 97.5–98.0. If talks collapse or the US launches new strikes, DXY will return to 99.5–100.0. My base forecast is a range of 97.8–99.2 with heightened volatility on every news item.
90 days. By August-September, the geopolitical factor will likely give way to macroeconomics. The key question: will Warsh and the Fed team convince the market of the need for tighter policy? If yes, the dollar will get support and could consolidate above 100. If not—and if employment data starts to deteriorate—DXY risks falling to 96.0–97.0. The second scenario seems more likely to me.
Editorial Forecast
Asset: DXY dollar index.
Direction: Further decline in the next 24–72 hours. A break of the 98.9 level is technically inevitable if the current news backdrop persists. Liquidity remains low after the weekend, amplifying the move.
Key levels: Nearest support at 98.86, next at 98.0. Resistance at 99.2.
Confidence level: Medium (45% for a decline to 98.5–98.8, 30% for sideways, 25% for a bounce).
Main risk: A sudden Trump statement ending negotiations or new airstrikes on Iran—in that case, the dollar would get a powerful safe-haven boost and could exceed 99.5 within hours, completely invalidating the decline forecast. The probability of such a scenario amid conflicting signals from Washington is estimated at 20–25%.
— Editorial Team
