Dollar Little Changed, Middle East Situation in Focus

The dollar index was little changed at around 100.9 on Friday and was also on track to end the week largely unchanged, as traders continued to assess the fragile and uncertain situation in the Middle East. Oil prices eased after surging earlier in the week, following reports that the US and Iran would continue peace negotiations. However, renewed exchanges of strikes between the two countries raised concerns that the conflict could escalate further, with the status of the previous truce remaining uncertain. The renewed hostilities also revived fears of another wave of inflationary pressure, reinforcing expectations that the Fed may need to tighten monetary policy. Markets currently assign a 62% probability of a Fed rate hike in September, up from 58% a week ago but down from around 70% earlier this week. Meanwhile, New York Fed President John Williams said that, among the factors driving inflation in the US, he is most concerned about demand fueled by AI.

The dollar index fell toward 100.5 on Friday, extending losses for a third straight session as reports that the US and Iran will continue peace negotiations despite a recent escalation in hostilities dampened safe-haven demand for the currency. Lower oil prices also helped ease inflation concerns and reduce expectations of aggressive policy tightening, although markets still largely anticipate at least one Federal Reserve interest rate hike this year. Meanwhile, New York Fed President John Williams said that, among the factors driving inflation in the US, he is most focused on demand fueled by artificial intelligence. Separately, Fed Chair Kevin Warsh unveiled the leadership of five task forces to review the US central bank’s approach to key areas of policymaking, signaling the potential for changes in how the Fed conducts monetary policy. The dollar weakened broadly on Friday, posting its largest declines against the Japanese yen and the New Zealand dollar.

The dollar index traded near 101 on Thursday, little changed from the previous two sessions, as investors continued to assess the implications of the Middle East conflict for inflation and monetary policy. The US and Iran continued to exchange strikes, although the surge in oil prices eased after soaring over the previous two sessions. Minutes from the Fed's June meeting showed policymakers remained divided over the path of interest rates, discussing several possible scenarios, with only a few officials favoring a rate hike. Markets continue to price in at least one Fed rate hike by the end of 2026, while the probability of a move at the September meeting stands at around 64%. The dollar was slightly weaker against the Japanese yen, as investors assessed whether Japanese authorities had intervened to support the currency. The euro edged higher against the greenback as expectations for another ECB interest rate hike strengthened.