Dollar Little Changed on Friday

The dollar index traded little changed around 99.3 on Friday and was also on track to end the week broadly flat, as traders continued to monitor developments in the Middle East. Although the situation remains fragile and uncertain, a series of mixed signals from both sides has strengthened investor optimism that a diplomatic agreement could eventually be reached. Even so, oil prices remain roughly 50% above pre-conflict levels, continuing to fuel inflationary pressures and reinforcing a cautious stance among major central banks. Minutes from the latest Federal Open Market Committee meeting showed that most policymakers still see the possibility of additional rate hikes if inflation remains persistently above the Federal Reserve’s 2% target. Markets have also increasingly priced in the likelihood of a 25-basis-point rate hike by the end of the year.

The dollar index rose to around 99.3 on Friday, hovering near its highest level in six weeks as mixed signals surrounding US-Iran peace negotiations kept investors wary about inflation risks and the outlook for interest rates. Tehran said the latest US proposal had partially narrowed differences between the two sides, though comments from Iran’s Supreme Leader regarding the country’s uranium stockpile, along with disagreements over tolls in the Strait of Hormuz, continued to cloud hopes for a breakthrough agreement. Meanwhile, minutes from the latest FOMC meeting showed that most policymakers believe additional interest rate hikes could still be appropriate if inflation remains persistently above the Federal Reserve’s 2% target. Despite this, markets continue to broadly expect rates to stay unchanged through the remainder of the year, although traders are currently pricing in roughly a 40% probability of a 25 basis-point rate increase in December.

The dollar index rose to 99.4 on Thursday, reaching April-highs, as doubts emerged again about near term resolution to the Iranian war pushing oil prices higher again and reigniting inflation concerns. Reuters reported that Iran’s Supreme Leader has issued a directive stating that the country’s near-weapons-grade uranium should not be sent abroad, hardening Tehran’s position on a key US demand in peace talks. Meanwhile, minutes from the latest FOMC meeting showed that a majority of policymakers believe additional rate hikes may be warranted if inflation remains persistently above the Federal Reserve’s 2% target. Markets still broadly expect rates to remain unchanged for the rest of the year, although traders are currently pricing in roughly a 40% chance of a 25 basis-point hike in December.