US Dollar weakens despite escalating Middle East tensions as markets await US data

The US Dollar (USD) struggled to attract buyers early Thursday despite a fresh escalation in tensions in the Middle East.

Investors shifted their focus toward upcoming US economic data releases and comments from central bank officials while monitoring developments in the region.

Market participants are also expected to closely watch remarks from policymakers for fresh signals on the economic outlook and monetary policy.

Middle East tensions remain in focus

Geopolitical tensions intensified after the United States military said late Wednesday that it had struck 90 targets along Iran's coastline.

In response, Iran's Revolutionary Guard reportedly targeted US military bases in Kuwait and Bahrain.

Despite the renewed hostilities, crude oil prices edged lower during the European trading session on Thursday.

At the same time, the US Dollar Index remained under pressure, trading below the 101.00 level.

Risk sentiment appeared relatively resilient as US stock index futures advanced between 0.2% and 0.7%, suggesting investors were not moving aggressively toward traditional safe-haven assets.

The euro and pound extend gains against the dollar

The euro strengthened against the US dollar as renewed weakness in the greenback supported the common currency.

After ending Wednesday's session largely unchanged, the EUR/USD pair climbed toward the 1.1450 level during the European session on Thursday.

The British pound also maintained its upward momentum.

GBP/USD extended gains after closing in positive territory on Wednesday and traded above the 1.3400 mark, reaching its highest level in three weeks.

However, the EUR/USD remained close to the 1.1400 level overall, with further upside limited as escalating US-Iran tensions in the Strait of Hormuz offset the impact of a slightly weaker US dollar.

Yen strengthens as Bank of Japan maintains regional assessment

The Japanese yen gained against the US dollar after USD/JPY reversed lower on Thursday.

The currency pair traded below 162.50 after posting a gain of around 0.3% in the previous session.

Meanwhile, the Bank of Japan's latest quarterly regional report showed no changes to its overall assessment across all nine regions of the country.

The report indicated that most regional economies continue to recover moderately.

Indian rupee opens stronger

The Indian rupee opened higher against the US dollar on Thursday, supported by broad-based weakness in the US currency.

The USD/INR pair declined to around 95.40 as the dollar softened.

However, the broader outlook for the pair remained bullish, with renewed Middle East hostilities continuing to support oil prices, a factor that could influence the rupee going forward.

For now, currency markets continue to balance geopolitical uncertainty with incoming economic data, while movements in oil prices, gold and global risk sentiment remain key drivers of trading activity.