Dollar Hovers at April-Highs

The dollar index was little changed at 99 on Wednesday, hovering near April highs, as investors continued to focus on developments in the Middle East. Hopes that the US and Iran may be closer than ever to reaching an agreement to end the conflict and reopen the Strait of Hormuz pushed oil prices lower, helping to ease concerns over another potential spike in inflation. The optimism came despite mixed signals from both Washington and Tehran, as well as fresh strikes earlier this week. Iranian state television reported details of an unofficial draft memorandum between Tehran and Washington, under which the two countries would restore traffic flows through the Strait of Hormuz, while Iran and Oman would establish a mechanism to manage passage through the waterway. However, the White House later denied the report. Meanwhile, on the monetary policy front, markets are currently pricing in roughly a 50% probability of a Federal Reserve rate hike by December.

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.