Dollar Strengthens as US-Iran Conflict Escalates
The U.S. dollar strengthened on Thursday after the United States and Iran exchanged fresh air strikes, increasing fears that the already fragile ceasefire between the two countries may be collapsing.
Investor sentiment also remained cautious ahead of the release of a key U.S. inflation report later in the day, which could provide further clues about the economic impact of the Iran conflict and the future direction of interest rates.
Most major currencies weakened as oil prices surged following the latest attacks, increasing concerns about rising inflation and broader market instability.
Euro and Pound Retreat as Safe-Haven Demand Rises
The euro and British pound both slipped around 0.2% against the dollar, while the Japanese yen remained close to levels that previously triggered intervention by Japanese authorities earlier this month.
The dollar index and dollar index futures gained between 0.1% and 0.2%, reaching their highest levels in nearly two months.
Market demand for the dollar increased as investors sought safer assets amid growing geopolitical tensions and concerns about global economic uncertainty.
Fresh US-Iran Strikes Push Oil Prices Higher
The U.S. military reportedly launched strikes on targets in southern Iran early Thursday, prompting retaliatory Iranian attacks on a U.S. military base in Kuwait.
The escalation came shortly after U.S. President Donald Trump dismissed reports suggesting Iran could reopen the Strait of Hormuz within 30 days.
Trump also rejected the possibility of Iran and Oman jointly managing shipping traffic through the strategically important waterway.
At the same time, the U.S. Treasury Department imposed sanctions on an Iranian entity that was established to collect transit tolls for vessels passing through Hormuz.
Oil prices jumped as much as 4% following the latest attacks, fueling concerns that higher energy costs could lead to stronger inflation pressures and force the Federal Reserve and other major central banks to maintain a more hawkish monetary policy stance.
PCE Inflation Data in Focus
Investors are now closely monitoring the release of the April Personal Consumption Expenditures (PCE) price index data, the Federal Reserve’s preferred measure of inflation.
Analysts expect core PCE inflation to remain well above the Fed’s long-term 2% target, reinforcing concerns that interest rates could stay elevated for longer.
Recent inflation data released earlier this month already showed mounting price pressures linked to rising energy costs.
Japanese Yen Nears Intervention Levels Again
The Japanese yen weakened slightly on Thursday, with the USD/JPY currency pair moving closer once again to the 160 yen level against the dollar.
That level previously prompted intervention by the Bank of Japan in early May, with Japanese officials warning they are prepared to step into currency markets again if needed.
Meanwhile, the South Korean won weakened after the Bank of Korea left interest rates unchanged at 2.50%, a move that was widely expected by markets.
However, policymakers signaled growing concerns about inflation risks linked to rising oil prices during the central bank’s first meeting under new Governor Shin Hyun-Song.
Australian Dollar and Asian Currencies Weaken
The Chinese yuan and Taiwan dollar also moved lower against the dollar, while the Australian dollar declined 0.3%.
The Australian currency is often viewed by investors as a proxy for global risk appetite, meaning it tends to weaken during periods of geopolitical tension and market uncertainty.
