Dollar Below Recent Highs

The dollar index was little changed at around 99.4 on Wednesday, remaining below the ten-month highs reached earlier this month, as traders weighed the prospects of a potential de-escalation in the conflict with Iran. US President Trump said Washington was negotiating with Tehran and suggested that Iran may be willing to reach a peace agreement, although Iranian authorities have denied engaging in direct talks. He also noted that he had stepped back from his recent threat to order strikes on Iranian energy infrastructure “based on the fact that we’re negotiating”. Oil prices fell by around 6% in response, providing some temporary relief from concerns over a renewed spike in inflation. Meanwhile, traders have scaled back expectations for Federal Reserve rate cuts this year and now anticipate no reductions for the time being.

The dollar index strengthened above 99 on Wednesday, but remained 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.