Dollar Holds Gains on Mideast Escalation

The dollar index fell toward 98 on Wednesday, ending a three-day advance as growing optimism that Washington could reach a deal with Tehran reduced demand for the currency’s safe-haven appeal. Defense Secretary Hegseth said the ceasefire that began nearly a month ago remains intact, while Secretary of State Rubio confirmed that offensive operations have concluded as Washington shifts its focus to protecting shipping routes in the strait. President Trump also announced a temporary pause in a US-led effort to assist stranded vessels in exiting the Strait of Hormuz to allow time for renewed talks with Tehran. Oil prices retreated, easing inflation concerns and tempering expectations that the Federal Reserve may need to raise interest rates to arrest price pressures. Market participants now turn to ADP’s private payrolls report for April to assess labor market strength, ahead of the more closely watched monthly jobs report due Friday.

The dollar index traded little changed at 98.4 on Tuesday, pausing the gains recorded over the previous two sessions as tensions between the US and Iran showed signs of easing. This follows an intense day on Monday, when both countries exchanged fire and the UAE became involved. A ceasefire now appears to be holding, and US Defense Secretary Pete Hegseth said two US commercial vessels transited safely through the Strait of Hormuz with military support, offering some reassurance. Still, the situation remains fragile. On the policy front, the Fed is widely expected to keep the federal funds rate unchanged through the rest of the year, with markets pricing in roughly a 50% chance of a quarter-point hike in early 2027. The dollar weakened against the euro, the pound, and the Australian dollar after the Reserve Bank of Australia raised borrowing costs for a third consecutive meeting. In contrast, the greenback gained against the yen amid suspected intervention by Japanese authorities.

The dollar index hovered around 98.5 on Tuesday after rebounding in the previous session, supported by safe-haven demand as renewed violence in the Middle East threatened to derail the four-week ceasefire between the US and Iran. US forces repelled Iranian attacks while escorting two US-flagged vessels through the Strait of Hormuz, while the UAE reported intercepting cruise missiles launched by Iran and attributed a major fire at its Fujairah port to a drone strike. Oil prices, the dollar, and Treasury yields advanced in tandem on expectations that the Federal Reserve may need to raise interest rates to contain inflation. Investors now turn their attention to upcoming speeches from Fed officials and a batch of key economic releases, including the closely watched monthly jobs report. The US economy is projected to have added around 60K jobs in April, a sharp slowdown from the 178K increase recorded in March.