Dollar Weakens Slightly, Still Set for Weekly Gain

The dollar index fell below 98.6 on Friday, paring an earlier rise, as traders continued to focus on developments in the Middle East. Al Jazeera reported that government sources indicated a “high likelihood of a breakthrough” in US–Iran talks in Islamabad, with a delegation led by Iran’s Foreign Minister expected to arrive in the Pakistani capital tonight. In addition, US President Trump announced a three-week extension to the ceasefire in Lebanon, which was due to expire on Sunday. Still, the greenback is up about 0.7% on the week, its first weekly gain in three weeks, as the stalemate in US–Iran talks and the near closure of the Strait of Hormuz continue to support higher oil prices and add to inflationary pressures, prompting traders to reassess the interest rate outlook. The Fed is widely expected to keep the federal funds rate unchanged next week, with no further rate changes anticipated for the remainder of the year.

The dollar index hovered around 98.8 on Friday and was on track for its first weekly gain in three weeks, as stalled US-Iran peace efforts supported demand for the safe-haven currency. President Donald Trump said in a social media post on Thursday that he had ordered the US Navy to “shoot and kill” vessels laying mines in the Strait of Hormuz. The strategic waterway remains effectively closed, with both sides maintaining their blockades, driving energy prices higher and intensifying inflation risks. Meanwhile, the Federal Reserve is widely expected to keep the fed funds rate unchanged next week and for much of the year, as policymakers assess the impact of the Iran conflict on inflation and economic growth. Investors have also taken note of comments from Fed nominee Kevin Warsh earlier this week, in which he pledged to uphold independence in monetary policy decisions.

The dollar index hovered around 98.6 on Thursday, holding near a two-week high, as traders remained focused on the escalating standoff between the US and Iran. Uncertainty around peace negotiations persists, while rhetoric remains heated. In the latest developments, US President Trump ordered the US Navy to target any vessels laying mines in the Strait of Hormuz and pledged to intensify efforts to secure the waterway. The US continues to enforce a blockade on ships to and from Iranian ports, while Tehran has effectively curtailed international maritime traffic. As a result, oil prices remain well above pre-conflict levels, and activity in the Strait is largely stalled. Meanwhile, the Fed is widely expected to keep the fed funds rate unchanged next week and for most of the year. Markets are currently pricing in a 26% chance of a 25bps rate cut in December, down from earlier expectations of two cuts this year prior to the escalation in conflict.