Dollar Rises as US-Iran Talks Fail

The dollar index climbed back above 99 on Monday, recovering part of last week’s losses after President Donald Trump announced a blockade of the Strait of Hormuz following the failure of weekend peace talks between the US and Iran. Vice President JD Vance left Islamabad without securing an agreement with Iranian counterparts, citing their refusal to halt efforts to develop nuclear weapons, while Tehran reportedly demanded control of the Strait of Hormuz, war reparations, and the release of frozen assets. The effective closure of the critical shipping lane has driven energy prices sharply higher and heightened inflation risks, reinforcing expectations that the Federal Reserve may delay interest rate cuts or even consider rate hikes. These developments have supported the dollar, which also emerged as the strongest-performing safe-haven asset amid the ongoing crisis.

The dollar index remained below 99 on Friday, as investors continued to monitor developments in the Middle East and assess the latest US CPI report. US and Iranian delegations are set to meet in Pakistan on Saturday, while Israel has agreed to hold talks with Lebanon’s government, raising hopes of de-escalation in the region. However, the Strait of Hormuz remains largely closed, keeping oil prices elevated. The impact of the war with Iran is already being reflected in US inflation data. Consumer prices rose 0.9% in March, the largest monthly increase since June 2022, pushing the annual rate to 3.3%, the highest since May 2024 and in line with expectations. Core CPI, however, rose more modestly to 2.6% from 2.5%, suggesting that the full impact of the oil shock has yet to pass through to underlying inflation. Investors currently see little chance of another interest-rate cut by the Fed in 2026 and many economists are maintaining forecasts for one or more reductions later in the year.

The dollar index held steady near 99 on Friday but was still on track to fall more than 1% for the week, as a two-week US-Iran ceasefire drove a sharp drop in oil prices and eased concerns over resurgent inflation and possible interest rate hikes. Investors are now focused on diplomatic talks in Islamabad this weekend, where Vice President JD Vance will lead a US delegation in discussions with Iranian officials. However, sentiment remained cautious amid continued Israeli strikes on Lebanon and ongoing disruptions in the Strait of Hormuz that could complicate negotiations. On the macroeconomic front, markets awaited the March CPI report due later today for clues on how the Middle East conflict has affected inflation. Meanwhile, minutes from the Federal Open Market Committee’s March meeting indicated policymakers were concerned the conflict could sustain inflationary pressures and potentially require further rate hikes, though they still anticipated one rate cut this year.