Dollar Holds Gains on Warsh Nomination

The dollar index slipped to around 99 on Monday, pulling back from six-week highs as growing optimism over a potential US-Iran agreement that could reopen the Strait of Hormuz eased concerns about inflation and interest rate hikes. Still, President Donald Trump said Washington would keep its blockade of the strait in place until a formal agreement is reached, adding that he would not “rush” into a deal. The dollar had climbed to its highest level in six weeks last week as investors increasingly bet that the Federal Reserve may need to tighten monetary policy to contain inflation, with traders fully pricing in a rate hike by the end of the year. However, the prospect of a US-Iran deal and the potential reopening of Hormuz have led to lower oil prices, allaying inflation concerns. Investors are now focused on upcoming PCE inflation data for further clues on the Fed’s policy outlook. Trading activity is also expected to remain subdued with US markets closed for a public holiday.

The dollar index traded little changed around 99.3 on Friday and was also on track to end the week broadly flat, as traders continued to monitor developments in the Middle East. Although the situation remains fragile and uncertain, a series of mixed signals from both sides has strengthened investor optimism that a diplomatic agreement could eventually be reached. Even so, oil prices remain roughly 50% above pre-conflict levels, continuing to fuel inflationary pressures and reinforcing a cautious stance among major central banks. Minutes from the latest Federal Open Market Committee meeting showed that most policymakers still see the possibility of additional rate hikes if inflation remains persistently above the Federal Reserve’s 2% target. Markets have also increasingly priced in the likelihood of a 25-basis-point rate hike by the end of the year.

The dollar index rose to around 99.3 on Friday, hovering near its highest level in six weeks as mixed signals surrounding US-Iran peace negotiations kept investors wary about inflation risks and the outlook for interest rates. Tehran said the latest US proposal had partially narrowed differences between the two sides, though comments from Iran’s Supreme Leader regarding the country’s uranium stockpile, along with disagreements over tolls in the Strait of Hormuz, continued to cloud hopes for a breakthrough agreement. Meanwhile, minutes from the latest FOMC meeting showed that most policymakers believe additional interest rate hikes could still be appropriate if inflation remains persistently above the Federal Reserve’s 2% target. Despite this, markets continue to broadly expect rates to stay unchanged through the remainder of the year, although traders are currently pricing in roughly a 40% probability of a 25 basis-point rate increase in December.