USD index drops on dovish Fed expectations and easing geopolitical tensions

The US Dollar Index fell 0.4% to 105.75 as markets interpreted recent Federal Reserve communications as increasingly dovish while global geopolitical tensions showed signs of easing. Fed officials' recent speeches suggested growing comfort with current inflation trends, fueling speculation of potential rate cuts in Q3 2025. The dollar's decline accelerated as reduced geopolitical risks diminished safe-haven demand, with Middle East ceasefire talks progressing positively. EUR/USD capitalized on dollar weakness, rising 0.5% to 1.0855, while commodity currencies outperformed with AUD/USD and NZD/USD gaining 0.6% each. The DXY's break below 106.00 support opens the path toward 105.50, where the 50-day moving average provides next support. Market positioning data shows speculative shorts increasing, suggesting further downside potential. Traders await Friday's US PCE inflation data, which could either validate dovish Fed expectations or trigger a dollar rebound if inflation surprises higher.