The U.S. dollar strengthened on Thursday, recovering after a brief pullback from its three-month highs as geopolitical tensions in the Middle East continued to shake global financial markets. The ongoing conflict increased uncertainty among investors, pushing many toward the dollar, which is widely considered a safe-haven currency during periods of market stress.
Earlier in the trading session, the dollar’s sharp rally temporarily paused as some investors hoped the conflict might not last as long as initially feared. There were also expectations that oil shipments through the Strait of Hormuz could resume normally, easing concerns about disruptions in global energy supplies.
However, market sentiment remained fragile as the U.S.-Israel conflict with Iran entered its sixth day. Iran launched another wave of missiles toward Israel, forcing millions of civilians into bomb shelters and heightening geopolitical tensions across the region.
As uncertainty intensified, the dollar quickly regained strength and reversed its early losses. The euro slipped 0.2% to $1.1608, while the British pound declined 0.27% to $1.3335. Against a basket of major currencies, the U.S. dollar index (DXY) rose 0.2% to 99.00, continuing its climb toward the three-month high reached earlier in the week.
According to Bas van Geffen, senior macro strategist at Rabobank, traditional safe-haven assets have not behaved as expected during this period of volatility. He noted that despite geopolitical risks, gold has not played its usual defensive role, leaving the dollar as the dominant safe-haven asset.
Van Geffen added that the strong performance of the DXY index suggests that dollar liquidity is currently the most sought-after asset in global markets.
The dollar has gained nearly 1.4% this week, making it one of the few clear winners during a turbulent period that has weighed on global equities, bonds and even precious metals at times.
At the same time, the surge in energy prices triggered by the Middle East conflict has raised concerns that inflation could accelerate again. Such a development could disrupt the monetary policy outlook of major central banks around the world.
Market expectations for interest rate cuts have already shifted. Traders now see only a 34% probability that the Federal Reserve will cut interest rates in June, compared with about 46% just a week earlier, according to the CME FedWatch Tool. Stronger-than-expected U.S. economic data released on Wednesday also contributed to the reduced expectations for near-term rate cuts.
Expectations for rate cuts from the Bank of England have also declined, while money markets have increased bets that the European Central Bank may raise interest rates as early as this year.
Thierry Wizman, global FX and rates strategist at Macquarie Group, said that central bankers are increasingly concerned that inflation could return as a major risk. If energy supplies become constrained due to geopolitical tensions, the world could face another inflation surge in the coming years.
According to Wizman, the U.S. interest rate outlook may be particularly vulnerable to a new wave of global inflation by 2026, especially if disruptions in energy supply push prices higher.
In currency markets, the Japanese yen also reversed earlier gains, trading nearly unchanged at 157.08 per dollar.
The Australian dollar fell 0.35% to $0.7050, after rising 0.57% in the previous session when the U.S. dollar briefly weakened. Meanwhile, the New Zealand dollar declined 0.2% to $0.5930.
The Australian dollar has been especially volatile this week. It has acted both as a proxy for global risk sentiment and, at times, as a partial safe-haven currency due to Australia’s strong energy resources, which could benefit from rising oil prices.
Meanwhile, China announced its economic growth target for 2026, setting a range between 4.5% and 5%, slightly lower than the 5% growth achieved last year. The new target reflects a more cautious outlook while still leaving room for policies aimed at reducing industrial overcapacity and rebalancing the Chinese economy.
Following the announcement, the Chinese yuan rebounded from a one-month low, rising 0.1% to 6.8904 per dollar. The move came after the People’s Bank of China set its currency guidance at the strongest level in nearly three years.
Junyu Tan, regional economist for North Asia at Coface, said that despite the slightly lower growth target, Chinese policymakers are likely to aim for the upper end of the 4.5%–5% range.
Tan emphasized that the more conservative growth goal should not be seen as a shift away from China’s pro-growth policy stance but rather as a pragmatic adjustment to current economic conditions.
In cryptocurrency markets, Bitcoin and Ethereum both declined more than 1%, giving back part of the strong gains recorded in the previous trading session.
