Dollar Edges Higher on US-Iran Tensions

The dollar index rose above 99.3 on Thursday, marching toward seven-week highs as reports of fresh US strikes on an Iranian military facility clouded prospects for a peace agreement and kept concerns over inflation and interest rates elevated. The two countries also remained at odds over key issues including Tehran’s insistence on maintaining control of the Strait of Hormuz and preserving its nuclear program. Meanwhile, Minneapolis Fed President Neel Kashkari said on Thursday that lowering inflation in the US remains his top priority, noting that consumer prices are still elevated while the labor market continues to show resilience. Investors are now focused on the upcoming PCE price index release, the Federal Reserve’s preferred inflation measure, for further guidance on the outlook for US interest rates. Markets are currently pricing in roughly a 50% chance of a Federal Reserve rate hike by December.

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.