Dollar Gains as Traders Monitor US-Iran War

The dollar index rose toward 99 on Thursday, finding support after coming under pressure in the previous session as investors continued to track developments in the US-Iran conflict following the sinking of an Iranian warship by a US submarine off the coast of Sri Lanka. The broader US-Israeli campaign against Iran has now entered its sixth day, keeping markets alert to further escalation and the potential for a protracted conflict that could weigh on economic growth and fuel inflation. On Wednesday, the dollar pulled back after reports emerged that Iranian operatives had reached out to the US to explore possible peace talks, though Tehran later denied the outreach. Meanwhile, Treasury Secretary Scott Bessent said President Donald Trump’s recently announced 15% global tariff is likely to take effect later this week. On the economic data front, US services activity rose to a more than 3½-year high in February, while private-sector employment growth exceeded expectations.

The dollar index dipped about 0.3% below 99 on Wednesday, after rallying 1.5% over the previous 2 sessions, as traders paused to weigh developments in the conflict with Iran, including a New York Times report that Iranian operatives had offered to discuss terms for ending the fighting, while oil and gas prices eased. Also, President Trump said Washington would insure and escort vessels transiting the Strait of Hormuz if necessary. While details of the plan remain unclear, the announcement helped ease some pressure in energy markets. Meanwhile, the Treasury Secretary said the global 15% tariff starts this week, adding that he expects the levies to revert to their previous levels within 5 months.The recent spike in oil and gas prices has fueled concerns about renewed inflationary pressures, prompting investors to dial back expectations for Fed rate cuts. Markets are now pricing in the next reduction in September rather than July, though two 25bps cuts are still anticipated in 2026.

The dollar index held above 99 on Wednesday after a sharp two-day rally, 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.