Dollar Strengthens on Middle East Uncertainty

The dollar index edged up to 98.7 on Tuesday, approaching a three-week high, as ongoing uncertainty in the Middle East and rising oil prices rekindled fears of an inflationary spiral. The White House said President Trump would address Iran’s proposal to reopen the Strait of Hormuz “very soon,” although the plan avoids tackling the nuclear issue until hostilities in the Gulf subside. Meanwhile, the Fed's two-day policy meeting begins today. Policymakers are widely expected to keep the federal funds rate unchanged, with no adjustments anticipated for the remainder of the year. The ECB and the BoE are also set to announce policy decisions, with money markets pricing in potential rate hikes as early as June. In Asia, the BoJ left rates unchanged, and Governor Ueda offered little guidance on the timing of future increases, weighing on the yen. The dollar posted its strongest gains against the euro, the pound, and the Australian dollar.

The dollar index hovered around 98.5 on Tuesday after a sharp intraday drop in the prior session, as renewed diplomatic efforts to resolve the US–Iran conflict reduced demand for the safe-haven currency. Iran reportedly delivered a new proposal to the US through Pakistani mediators, offering to reopen the Strait of Hormuz if Washington lifts its blockade, though Tehran’s nuclear program remains a key sticking point in negotiations. Attention is also turning to the upcoming Federal Reserve policy meeting, where rates are widely expected to remain unchanged in what could be Jerome Powell’s final session as Fed chair. Fed nominee Kevin Warsh has emphasized policy independence, even as markets continue to price in a more aggressive easing cycle ahead. Investors are also awaiting policy decisions from other major central banks this week, including the ECB, BOE, and BOJ.

The dollar index slipped to around 98.5 on Monday after briefly climbing as high as 99.3 earlier in the session, as markets reacted to reports that Iran had submitted a new proposal to the US aimed at reopening the Strait of Hormuz and easing tensions. The proposal, reportedly delivered via Pakistani mediators, called for an extension of the ceasefire to enable progress toward a lasting settlement, while postponing nuclear negotiations until the US blockade of the strait is lifted. Earlier in the session, the dollar jumped after President Donald Trump cancelled plans to send senior envoys for a second round of talks with Iran, while Tehran reiterated it would not engage in negotiations under threats or blockade conditions. Meanwhile, the Federal Reserve is widely expected to keep its policy rate unchanged on Wednesday, a meeting that could mark Jerome Powell’s final session as chair before Kevin Warsh is expected to assume the role in May.