Dollar Gains on Safe-Haven Demand Amid Middle East Tensions and Fed Caution

The U.S. dollar strengthened on Thursday, driven by safe-haven demand as fears of an escalating Middle East conflict intensified. Reports that Washington is preparing for a potential strike on Iran pushed investors toward the dollar, overshadowing the Federal Reserve’s latest policy decision.

The greenback rose broadly, pressuring risk-sensitive currencies. The Australian dollar dropped 0.3% to $0.6489, while the New Zealand dollar fell 0.5% to $0.5998. The South Korean won weakened by 1%, and emerging market currencies followed suit.

With Iran and Israel exchanging further airstrikes, the conflict—now in its seventh day—has sparked global concern, especially over possible U.S. military involvement. President Donald Trump’s ambiguous stance on intervention has added to market jitters.

The dollar index climbed 0.11% to 99, aiming for a 0.9% weekly gain—its best since January. The euro slipped 0.25% to $1.1455, marking its largest weekly drop since February. The yen traded at 145.13 per dollar, while sterling edged 0.14% lower to $1.3403 ahead of the Bank of England’s rate decision.

Investor sentiment turned risk-averse despite the Federal Reserve holding interest rates steady. While policymakers still project two rate cuts in 2025, Chair Jerome Powell warned that upcoming tariffs under Trump’s trade policy could lift inflation, affecting consumer prices. He emphasized uncertainty over the timing and scale of any rate reductions.

Markets are pricing in rate cuts in September and December, though analysts remain divided. Some, like ING and Aberdeen Investments, caution that the Fed may only cut once—or not at all—depending on trade and economic data.

U.S. market closures for the Juneteenth holiday thinned liquidity, amplifying the dollar’s reaction to geopolitical risks. Meanwhile, traders await policy updates from the Swiss National Bank and Norges Bank.