Dollar Edges Higher on Inflation Worries

The dollar index climbed to around 99.3 on Wednesday, extending gains for a third session as fears that a protracted Middle East conflict could sustain the rally in energy prices fanned inflationary concerns. Traders scaled back expectations for Federal Reserve rate cuts, now pricing in the next reduction in September instead of July, though two 25 basis point cuts are still expected this year. The dollar was also supported by safe-haven demand as the US-Israeli war on Iran entered its fifth day, with Israel striking a building where clerics were meeting to elect a new Supreme Leader on Tuesday. US President Donald Trump voiced concern that the attacks could bring a new Iranian leadership as troubling as the prior regime, underscoring the conflict’s uncertain trajectory. The dollar strengthened broadly, posting the largest gains so far this week versus the euro and antipodean currencies.

The dollar index strengthened nearly 1% to move above 99 on Tuesday, extending Monday’s 0.8% advance and reaching its highest level since mid-January. The gains came as escalating tensions in the Middle East and the ongoing conflict with Iran boosted safe-haven demand for the greenback. Investors are also viewing the US as a relative safe haven given its greater energy independence, further supporting the currency. Meanwhile, the surge in energy prices has reignited inflation concerns, prompting traders to scale back expectations for Federal Reserve rate cuts. Markets have now anticipate the Fed’s next rate reduction in September, from earlier projections of July, although two 25-basis-point cuts remain priced in for 2026. The dollar rose 1.3% against the Australian dollar, gained nearly 1% versus the euro, advanced 0.8% against the pound, and edged up 0.3% against the yen.

The dollar index strengthened above 98.5 on Tuesday after jumping nearly 1% in the previous session, supported by safe-haven flows amid risks of further escalations in the US and Israeli war against Iran. A senior US official reportedly indicated that Washington is preparing for a significant ramp-up in attacks on Iran within the next 24 hours, targeting the country’s missile production facilities, drone programs and naval assets. The greenback also drew support from expectations that rising energy prices, driven by the conflict, will fuel higher inflation and reduce the likelihood of near-term interest rate cuts by the Federal Reserve. Markets have pushed back expectations for the next Fed rate reduction to September from previous forecasts of July, although two 25 basis point cuts are still priced in. Meanwhile, elevated energy costs and inflation risks weighed on currencies of other major energy-importing economies, particularly in Europe and Japan.