Dollar Strengthens Amid Mideast Tensions and Powell’s Inflation Warning
The U.S. dollar firmed on Thursday, driven by heightened safe-haven demand amid fears of escalating conflict in the Middle East and potential U.S. involvement. At the same time, investors reacted to Federal Reserve Chair Jerome Powell’s cautious remarks on inflation.
After a subdued start in Asian markets, the dollar gained broadly, pressuring risk-sensitive currencies following reports that U.S. officials are preparing for a possible strike on Iran in the coming days.
The Australian dollar dropped as much as 0.5% before settling 0.3% lower at $0.6489. The New Zealand dollar fell 0.5% to $0.5998, and the South Korean won weakened by 1% as emerging market currencies came under pressure.
Intensifying geopolitical risks have reestablished the dollar’s safe-haven appeal, boosting it against the euro, yen, and Swiss franc. The conflict between Iran and Israel, now in its seventh day of aerial exchanges, continues to escalate, while speculation grows about whether the U.S. will join in targeting Iranian nuclear facilities. Tensions are further fueled by instability linked to the ongoing war in Gaza.
Some traders, anticipating greater volatility, began covering short positions on the dollar. “The dollar seems ripe for a short-covering rally—especially if the U.S. wades into the Middle East conflict,” said Matt Simpson, senior analyst at City Index.
According to Christopher Wong, a currency strategist at OCBC, geopolitical risks have overshadowed the Fed’s policy decision. “Risk aversion dominates sentiment, and that puts pressure on risk-sensitive FX,” he noted.
With U.S. markets closed Thursday for the Juneteenth holiday, trading volumes were lower, adding to the potential for price swings.
The euro fell to a one-week low, down 0.25% at $1.1455, and is on track for a 0.8% weekly decline—its largest since February. The yen was last trading at 145.13 per dollar.
The U.S. Dollar Index, which tracks the greenback against six major currencies, rose 0.11% to 99 and was poised for a weekly gain of 0.9%—its strongest since late January.
Powell Highlights Inflation Challenges
As expected, the Federal Reserve kept interest rates unchanged, with policymakers still signaling expectations for two rate cuts this year, although there was division over the timing and necessity of such moves.
During a press conference, Powell warned that consumer prices are likely to rise over the summer as tariffs imposed by President Trump begin to take effect. “Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer,” he said, citing both business feedback and historical data.
His comments highlighted the difficult path facing the Fed, as policymakers navigate both geopolitical turmoil and trade-related price pressures.
Despite the uncertainty, markets continue to expect at least two 25-basis-point rate cuts this year—most likely in September and December—though some analysts remain skeptical. ING economists said they believe the Fed may be hesitant to move as early as September.
Ray Sharma-Ong, head of multi-asset investment solutions at Aberdeen Investments, suggested that depending on how trade policy and the economic outlook evolve, the Fed might ultimately deliver just one rate cut—or none at all.
Elsewhere, the British pound slipped 0.14% to $1.3403 ahead of the Bank of England’s policy decision, where no change in rates is expected. The Swiss franc traded at 0.81995 per dollar ahead of the Swiss National Bank’s decision, while markets also await guidance from Norway’s central bank later in the day.
