Dollar Set for Sharp Weekly Drop

The dollar index traded around 100 on Thursday, lingering near its highest levels in two months after the US military launched fresh strikes against Iran, with President Donald Trump accusing Tehran of delaying negotiations over an interim peace agreement, lifting demand for safe-haven assets. The protracted conflict and the ongoing near-total closure of the Strait of Hormuz continued to disrupt energy flows from the Persian Gulf, fueling concerns about inflationary pressures and central bank interest rate hikes. Meanwhile, US consumer inflation accelerated in May to its fastest pace in more than three years due to soaring energy costs, though the reading matched market expectations. Traders modestly trimmed expectations for Federal Reserve rate hikes this year, although a quarter-point increase in December remains fully priced. Investors are now awaiting the latest producer inflation and weekly jobless claims figures for further clues on the outlook for Fed policy.

The dollar index fell slightly to 99.8 on Wednesday after US inflation data largely aligned with expectations, with only a minor downside surprise in core month-on-month figures. The headline inflation rate rose to 4.2% in May, its highest since April 2023, driven by surging energy costs amid the Iran conflict. The core rate also climbed to 2.9% year-over-year, the highest since September 2025. Month-over-month, CPI increased 0.5% as expected, while core inflation eased more than anticipated to 0.2%. Traders modestly reduced bets on Federal Reserve rate hikes this year, though a quarter-point increase in December remains fully priced in. Meanwhile, Middle East tensions stayed elevated, with the US and Iran exchanging fresh strikes. President Donald Trump warned that Iran is taking "too long" to negotiate a peace deal and will now "pay the price," raising doubts about the durability of a fragile ceasefire and the prospects for a long-term agreement.

The dollar index hovered around 100 on Wednesday after staging a sharp intraday rebound in the previous session, as renewed hostilities in the Middle East cast doubt on a fragile ceasefire and the prospects for a longer-term peace agreement. The US launched “self-defense strikes” against Iran in response to the downing of an American helicopter, while Iranian Foreign Minister Abbas Araghchi warned that Iran’s armed forces would leave no attack or threat unanswered. Higher energy prices driven by the regional conflict fueled concerns about inflation and the possibility of central bank rate hikes. Investors also awaited the latest US inflation data for fresh signals on the Federal Reserve’s policy outlook, after stronger-than-expected jobs figures last week reinforced expectations of an interest rate increase before the end of the year. Elsewhere, the ECB and the BOJ are widely expected to raise interest rates later this month.