Dollar Rises Further as War With Iran Escalates

The dollar index rose to 99.9 on Wednesday, the highest in three weeks, as Federal Reserve policymakers struck a hawkish tone in their rate hold and persistent geopolitical tensions supported the safety of the greenback. The Fed held its policy rates unchanged as expected by markets, but three FOMC members dissented against the easing bias in the central bank's signal. This increased the thresholds for regional Fed presidents, known for being more hawkish, to vote for an eventual cut. On top of that, Chair Powell announced he will stay in the FOMC for the meantime, removing the dovish dissenter Miran. President Trump signaled that an agreement to lift the blockade of tankers in the Persian Gulf will only be lifted with an Iranian nuclear agreement, adding more impasses to the conflict. The Bank of Canada signaled it does not see domestic inflation de-anchoring in its rate hold, although the BoJ delivered hawkish remarks in its meeting. Both the ECB and BoE decide their rates tomorrow.

The US dollar index edged above 98.8 on Wednesday, extending gains from the previous session as markets positioned for the upcoming Federal Reserve policy meeting, which is expected to be Chair Jerome Powell’s final one before his term ends in May. The Fed is broadly anticipated to keep interest rates unchanged, with investors closely watching how policymakers assess the economic impact of the Middle East conflict. Several other major central banks, including those in the EU and the UK, are also set to announce policy decisions this week, while the BOJ delivered a hawkish hold on Tuesday. At the same time, stalled US-Iran negotiations and the continued closure of the Strait of Hormuz have intensified inflation concerns, supporting demand for the safe-haven dollar. President Donald Trump was reportedly dissatisfied with Tehran’s latest proposal, insisting that nuclear-related issues be addressed from the outset of any agreement.

The dollar index edged up to 98.7 on Tuesday, approaching a three-week high, as ongoing uncertainty in the Middle East and rising oil prices rekindled fears of an inflationary spiral. The White House said President Trump would address Iran’s proposal to reopen the Strait of Hormuz “very soon,” although the plan avoids tackling the nuclear issue until hostilities in the Gulf subside. Meanwhile, the Fed's two-day policy meeting begins today. Policymakers are widely expected to keep the federal funds rate unchanged, with no adjustments anticipated for the remainder of the year. The ECB and the BoE are also set to announce policy decisions, with money markets pricing in potential rate hikes as early as June. In Asia, the BoJ left rates unchanged, and Governor Ueda offered little guidance on the timing of future increases, weighing on the yen. The dollar posted its strongest gains against the euro, the pound, and the Australian dollar.