US Dollar Hovers Near 3-Week High

The dollar index traded around 101.3 on Friday, hovering near a three-week high as US President Donald Trump's latest tariffs on major trading partners reinforced concerns over a renewed tariff wall. Under the new framework, imports from countries including Mexico, Canada, the UK, and India will face 10% tariffs linked to alleged forced-labor concerns, while goods from the European Union and Taiwan will be capped at 10%. Products from Japan, South Korea, and Switzerland will generally face duties of up to 12.5%, with additional charges applying to some goods. The greenback also drew support from rising expectations of tighter Federal Reserve policy amid escalating Middle East tensions that have fueled energy prices, as well as resilient US labor market conditions. Swap markets currently assign roughly a 34% chance of a Fed rate increase next week, with at least one hike fully priced in by September and the possibility of another before year-end.

The dollar index appreciated to 101.3 on Thursday, the highest level in about three weeks, as surging oil prices and escalating geopolitical tensions fueled expectations that the Fed will need to raise interest rates. Markets are now pricing in a more than 33% chance of a rate hike next week, while the probability of a September increase has climbed above 78%, up from 61% a day earlier. Hostilities in the Middle East continue to intensify, with no signs of a near-term resolution. As a result, oil prices have surged nearly 31% above their pre-conflict levels seen earlier this month. Although inflationary pressures have remained relatively contained so far, the latest spike in energy prices has renewed concerns that higher oil costs could feed into broader inflation, prompting the Fed to maintain a tighter monetary policy stance. The greenback advanced against the euro after the ECB left interest rates unchanged, as expected, while also posting gains against the yen and the pound.

The dollar index fell to around 101 on Thursday, extending losses from the previous session as traders weighed renewed inflation concerns from surging energy costs against a softer US economic backdrop while seeking clues on the Federal Reserve’s rate outlook. While markets widely expect the Fed to hold rates steady at next week’s meeting, uncertainty has increased over the path of future policy amid unclear guidance from new Chair Kevin Warsh. Meanwhile, safe-haven demand helped limit further dollar losses as Middle East tensions remained in focus. President Donald Trump said the US would strike Iranian infrastructure in response to any attacks on vessels in the Strait of Hormuz, while Tehran vowed retaliation against regional energy and infrastructure targets. Elsewhere, attacks on Red Sea tankers, the first such incidents since late February, further raised concerns over a broader regional conflict and potential disruptions to global trade flows.