The US Dollar Index (DXY) is edging lower after a strong start on Monday as markets monitor the risks of an Iranian retaliation against the United States (US) and look ahead to Federal Reserve (Fed) Chair Jerome Powell's upcoming testimony on Tuesday.

Over the weekend, US President Donald Trump confirmed that American forces struck three Iranian nuclear sites, prompting fears of retaliation from Tehran. The possibility that Iran could respond by disrupting Oil traffic through the Strait of Hormuz a critical maritime chokepoint has kept risk sentiment on edge.

The Dollar Index, which measures the USD against a basket of major currencies, began the week on a stronger footing, rising above the prior psychological resistance level of 99 before sliding lower.

Adding to the initial upside was Monday's release of S&P Global's preliminary Purchasing Managers' Index (PMI) data for June. The manufacturing index came in at 52, unchanged from May but above consensus expectations of 51. The services component moderated slightly to 53.1 from 53.7 but still indicated expansion. These figures underscored resilience in the US economy, helping to stabilize bond yields and support the US Dollar.

However, during the US session, attention shifted back to monetary policy. Fed Governor Michelle Bowman added to a growing chorus of officials leaning dovish, saying the central bank should stay open to the possibility of a rate cut in July as inflationary pressures ease. Her comments echoed those of Governor Christopher Waller last week, who suggested a cut in July could be warranted if disinflation continues.

With Chair Jerome Powell scheduled to deliver his semi-annual testimony before Congress on Tuesday, traders are preparing for a potentially pivotal update on the Fed's thinking. Following the Fed's latest dot plot, which penciled in two cuts for 2025, Powell's tone on inflation, growth, and global uncertainty will likely shape near-term moves in the US Dollar.

Source: Fxstreet