Dollar Edges Higher Amid Middle East Tensions, Central Bank Caution in Europe
The U.S. dollar inched higher on Thursday as fears of a broader conflict in the Middle East weighed on markets, and multiple European central banks signaled caution in the face of growing global uncertainty.
Rising geopolitical tensions have revived the dollar’s appeal as a safe-haven asset. As the Israel-Iran conflict entered its seventh day with continued airstrikes, uncertainty grew over whether the U.S. would intervene, especially after President Donald Trump gave no clear indication of Washington’s intentions regarding potential strikes on Iranian nuclear sites.
Meanwhile, the Federal Reserve left interest rates unchanged on Wednesday, a move echoed by the Bank of England on Thursday. The BOE cited persistent inflation and global volatility as reasons to maintain its current policy. The British pound initially slipped on the news but later regained most of its losses.
In contrast, the Swiss National Bank went ahead with a widely anticipated rate cut, strengthening the Swiss franc against the dollar.
Markets were surprised, however, by the Norges Bank, which cut rates by 25 basis points—defying expectations for a hold. As a result, both the dollar and the euro surged by 1% against the Norwegian crown, although the crown still ranks among the best-performing major currencies this year, having gained around 11% versus the dollar.
Elsewhere, the euro edged down 0.1% to $1.1473, while the dollar gained 0.2% against the yen to 145.56. The dollar index, which tracks the greenback against six major currencies, was flat at 98.9 but is on pace for a 0.8% weekly gain—its strongest since late February.
ING strategist Francesco Pesole noted that the dollar could reclaim its role as a global safe haven, especially since current risks—like Middle East tensions and rising oil prices—are not directly tied to U.S. domestic policy, unlike Trump’s tax cuts or tariffs.
“In this environment, the dollar is better positioned than energy-sensitive safe havens like the euro,” Pesole said.
U.S. markets were closed Thursday for the Juneteenth holiday, contributing to lower trading volumes.
Fed Holds Rates Steady, Flags Tariff-Driven Inflation
As expected, the Federal Reserve kept interest rates unchanged, maintaining its cautious stance. Policymakers continue to project a total of 50 basis points in cuts this year, though not all members agree on the need for easing.
Fed Chair Jerome Powell warned that inflation could rise this summer due to the effects of Trump’s newly announced tariffs. “Ultimately, someone has to pay for the tariffs—and part of that cost will be passed on to consumers,” Powell said during a press briefing Wednesday. He added that past data and business feedback support this outlook.
The Fed’s position highlights the challenge of navigating inflation risks from trade policy alongside global instability, leaving markets uncertain about the timing of any rate cuts.
Traders continue to price in at least two rate reductions in 2025, though analysts remain divided on when the first move might come.
BNP Paribas economists noted that after six months of unchanged rates, Powell appeared to signal that the Fed may stay on hold through summer, with October possibly being the next “live” meeting. “We continue to expect policy to remain unchanged through the end of the year,” they added.
President Trump, who has repeatedly criticized Powell for not cutting rates aggressively, renewed his pressure Thursday, posting on social media that U.S. interest rates should be “2.5 points lower.”
