Dollar Pares Most Gains

The dollar index was little changed at 98.1 on Monday, hovering near the pre-conflict levels seen last week and giving back most of its early gains from the Asian session, as investors focused on escalating tensions in the Middle East and a fresh setback in peace negotiations. On Sunday, the US said it had seized an Iranian cargo ship that attempted to breach its naval blockade, while Iran vowed to retaliate, heightening concerns over a renewed escalation in hostilities. Uncertainty also persists over whether US and Iranian officials will meet ahead of the expiry of a 14-day ceasefire on Tuesday, with Tehran indicating it will not take part in a second round of talks. Meanwhile, oil prices edged higher but remained below recent peaks. Still, concerns about spillovers to inflation and the prospect of rate hikes by the Fed continue to lend support to the greenback.

The dollar index climbed to around 98.3 on Monday, recovering part of last week’s losses as renewed US-Iran tensions lifted demand for the safe-haven currency. President Donald Trump said the US Navy fired on and seized an Iranian-flagged cargo vessel in the Gulf of Oman after it ignored warnings to stop while departing the Strait of Hormuz. Tehran also reversed plans to reopen the strait following Washington’s refusal to lift its blockade on Iranian ports and signaled it would not take part in a second round of negotiations. The prolonged conflict has triggered a severe energy supply shock, intensifying inflation risks and raising the prospect of further central bank rate hikes, while dampening expectations for Federal Reserve rate cuts this year. The Fed is widely expected to keep its policy rate unchanged this month and to remain on hold for the rest of 2026.

The dollar index fell about 0.5% to below 98 on Friday, marking its lowest level since the conflict with Iran began, as news of the temporary reopening of the Strait of Hormuz helped ease near-term inflation concerns. Iran’s Foreign Minister said that the strait is now fully open to all commercial vessels for the duration of the 10-day ceasefire. In response, oil prices tumbled more than 10%, prompting traders to ramp up bets on Federal Reserve rate cuts this year. Markets are now pricing in roughly a 50–50 chance of a 25-basis-point rate cut by year-end, up from around a 30% probability on Thursday. This still compares with earlier expectations of two rate cuts before the conflict escalated. The greenback weakened broadly, with the sharpest declines against the Swiss franc, Australian dollar, Japanese yen, and the euro. For the week, the dollar index is down about 0.5%, on track for a third consecutive weekly decline.