Dollar index climbs as US-Iran tensions escalate

The US Dollar (USD) gained sharply during the Asian trading session on Thursday after Iran retaliated against recent US attacks near Bandar Abbas airport, according to Tasnim agency reports.

At the time of writing, the US Dollar Index (DXY), which measures the Greenback against six major currencies, was trading 0.25% higher near the 99.50 level.

Iran’s Islamic Revolutionary Guard Corps (IRGC) confirmed that it had targeted US military bases and warned that any further attacks by the United States would face “a more decisive” response from the Iranian military.

The latest escalation follows earlier military action by the United States Central Command on Wednesday.

Those operations were described as “defensive strikes” and were reportedly aimed at Iranian boats deploying mines.

Geopolitical tensions lift demand for safe-haven Dollar

The exchange of attacks between the United States and Iran has weakened market optimism surrounding the possibility of a permanent peace agreement.

The renewed geopolitical tensions pushed investors toward safe-haven assets, helping the US Dollar attract strong bids during Asian trading hours.

Market participants also reacted to the impact of the conflict on energy markets.

Iran’s retaliation triggered a sharp rise in oil prices, increasing concerns that inflationary pressures could intensify further in the coming months.

Higher oil prices are often viewed as inflationary because they raise transportation and production costs across the global economy.

Traders now expect that persistent inflation risks could force the Federal Reserve (Fed) to maintain a restrictive monetary policy stance for longer than previously expected.

Fed rate expectations shift sharply

Expectations regarding Federal Reserve interest rate policy have shifted significantly since the conflict intensified.

According to the CME FedWatch tool, the probability of the Federal Reserve keeping interest rates unchanged through the year currently stands at 43.1%.

The remaining market participants expect at least one interest rate hike before the end of the year.

This marks a notable reversal in market sentiment.

Before the conflict began, traders had largely anticipated two interest rate cuts this year.

The sudden change in expectations reflects growing concerns that rising energy prices and geopolitical instability could complicate the Federal Reserve’s efforts to control inflation.

Investors await key US inflation data

Going forward, investor attention will turn toward the upcoming US Personal Consumption Expenditure (PCE) Price Index data for April, scheduled to be released at 12:30 GMT.

The PCE Price Index is considered the Federal Reserve’s preferred measure of inflation and is closely monitored by policymakers and financial markets.

Economists expect the US PCE inflation reading to rise at a faster annual pace of 3.8%, compared with the previous reading of 3.5%.

A stronger-than-expected inflation report could reinforce expectations that the Federal Reserve may need to maintain higher interest rates for a longer period.

Meanwhile, traders are expected to remain highly sensitive to further geopolitical developments involving the United States and Iran, as any additional escalation could continue to influence currency markets, oil prices, and broader investor sentiment.