Dollar Holds Steady Amid Middle East Uncertainty

The dollar index hovered above 99 on Wednesday after experiencing volatility earlier in the week, as investors continued to evaluate the prospects of a US-Iran peace agreement amid renewed tensions in the Middle East. President Donald Trump said talks aimed at extending a ceasefire and reopening the Strait of Hormuz are ongoing, while US Secretary of State Marco Rubio cautioned that any final deal could still take several more days to conclude. The US military said it conducted self-defense strikes in southern Iran, while Iran’s Revolutionary Guard claimed it targeted an F-35 fighter jet and several drones after they allegedly entered Iranian airspace. Meanwhile, Treasury yields continued to ease as markets scaled back expectations for near-term Federal Reserve interest rate hikes. Investor focus is now shifting toward upcoming PCE inflation data for further clues on the Fed’s future policy direction.

The dollar index steadied above 99 on Tuesday after facing pressure at the start of the week, as US military operations in southern Iran and ongoing peace negotiations kept investors cautious about inflation risks. The US military reportedly targeted vessels suspected of attempting to deploy mines, along with missile launch sites in southern Iran, which allegedly posed a threat to American forces in the region. At the same time, President Trump said talks with Tehran were progressing well, though he warned that further attacks could follow if negotiations collapsed, while a Pakistani mediator reportedly told China that an agreement was close. Last week, the dollar climbed to its highest level in six weeks as investors increasingly bet that the Federal Reserve may need to tighten monetary policy to contain inflation, with markets fully pricing in a rate hike before year-end. Attention is now turning to upcoming PCE inflation data for additional signals on the Fed’s policy path.

The dollar index slipped to around 99 on Monday, pulling back from six-week highs as growing optimism over a potential US-Iran agreement that could reopen the Strait of Hormuz eased concerns about inflation and interest rate hikes. Still, President Donald Trump said Washington would keep its blockade of the strait in place until a formal agreement is reached, adding that he would not “rush” into a deal. The dollar had climbed to its highest level in six weeks last week as investors increasingly bet that the Federal Reserve may need to tighten monetary policy to contain inflation, with traders fully pricing in a rate hike by the end of the year. However, the prospect of a US-Iran deal and the potential reopening of Hormuz have led to lower oil prices, allaying inflation concerns. Investors are now focused on upcoming PCE inflation data for further clues on the Fed’s policy outlook. Trading activity is also expected to remain subdued with US markets closed for a public holiday.