Dollar Slips on Mideast Developments

The dollar index fell toward 100 on Monday, trimming last week’s gains as reports that the US will soon announce a coalition of countries to escort ships through the Strait of Hormuz reduced demand for the safe-haven currency. Markets are also weighing the potential for US-Iran negotiations as the Middle East conflict entered its third week. Oil prices stabilized despite US attacks on military targets at Iran’s main oil-export hub of Kharg Island over the weekend and threats to strike energy infrastructure if Tehran interferes with Strait of Hormuz transit. Still, the dollar index remained near its highest levels in ten months as rising energy costs fueled inflation concerns, lowering expectations that the Federal Reserve will cut interest rates. The central bank is widely expected to hold rates steady this week in what would be Chair Jerome Powell’s penultimate meeting.

The dollar index climbed above 100.3 on Friday, its highest level since mid-May 2025, and was on track for a second consecutive weekly gain as traders continued to favor the greenback as a safe haven amid the escalating conflict with Iran and the lack of prospects for an imminent resolution. Defense Secretary Pete Hegseth told reporters that the US would carry out its largest wave of strikes yet against Iran on Friday. Oil prices also recovered after an early decline, remaining near their highest levels since 2022. Investors see the US as better positioned than other economies due to its greater energy independence. The Federal Reserve will decide on monetary policy next week and, although no changes to the federal funds rate are expected, markets will closely watch for clues about policymakers’ outlook for the remainder of the year, particularly how inflation may evolve in light of the recent energy rally. Investors are currently pricing in only one rate cut by the Fed in 2026.

The dollar index remained above the 100 mark on Friday, its highest level since late November 2025, and was on track for a second consecutive weekly gain as traders continued to favor the greenback as a safe haven amid the escalating conflict with Iran and the lack of prospects for an imminent resolution. Investors also see the US as better positioned than other economies due to its greater energy independence. At the same time, markets assessed a fresh batch of key economic data, including the PCE report, which showed the annual PCE inflation rate slowing to 2.8%. Meanwhile, GDP growth was revised sharply lower to 0.7% in Q4, half the initial estimate of 1.4%. As a result, traders reinforced bets on one Federal Reserve rate cut this year, possibly in September. The central bank will decide on monetary policy next week and, although no changes to the federal funds rate are expected, markets will closely watch for clues about policymakers’ outlook for the remainder of the year.