Dollar Holds Decline on Mideast Optimism

The dollar index held its recent decline near 99.1 on Wednesday, remaining under pressure amid reports that the US was pursuing talks with Iran to end the conflict. President Donald Trump said Iran had offered a gesture of goodwill in negotiations tied to energy flows through the Strait of Hormuz. Israeli media also indicated that Washington was seeking a one-month ceasefire to facilitate talks, while the New York Times reported that the US had sent Iran a 15-point proposal to resolve the conflict. Still, investors remained skeptical as Tehran denied engaging in any negotiations with the US, while Gulf states signaled readiness to join the war against Iran. Oil prices eased on these developments, providing some relief to markets concerned that surging energy costs could fuel inflation and prompt interest rate hikes. Meanwhile, Federal Reserve Governor Michael Barr said the central bank may need to keep rates elevated for some time to address inflation.

The dollar index rose to 99.4 on Tuesday, as traders continued to navigate the conflict with Iran and assess prospects for de-escalation. Reports point to ongoing communication and diplomatic efforts to end the war, but fighting has persisted despite President Trump’s announcement of a five-day pause. Adding to concerns, the Wall Street Journal reported that Saudi Arabia and the UAE are moving closer to joining the conflict against Tehran. Iran has continued its attacks on US bases in the Gulf and maintains that no negotiations with the US are underway. Meanwhile, oil prices are still rising, albeit at a slower pace, keeping pressure on inflation. As a result, traders are no longer expecting the Federal Reserve to deliver any rate cuts this year. Last week, the central bank left the fed funds rate steady and pointed to uncertainty about the impact of the Middle East war in the US economy, but still pointed to one quarter point reduction in 2026 and another in 2027.

The dollar index climbed toward 99.5 on Tuesday, recovering some losses from the previous session as Iran denied any talks to end the conflict, pushing back against President Donald Trump’s claims. Tehran also said it launched new attacks on US targets, while Israel continued strikes against Iran, keeping tensions elevated. On Monday, the dollar had come under heavy selling pressure after Trump postponed planned strikes on Iranian energy infrastructure for five days, citing productive discussions with Iran over the past two days. The outcome of any talks and the potential reopening of the Strait of Hormuz remain highly uncertain, while Middle Eastern energy capacity may take time to return to prior levels. That raises the risk of higher inflation in the coming months and the possibility of interest rate hikes from major central banks. Investors now turn their focus to upcoming US manufacturing data for fresh cues on how businesses are faring under heightened geopolitical risks.