Dollar Stabilizes as Markets Weigh Middle East Ceasefire Prospects and Central Bank Policy Outlook

The U.S. dollar regained some ground in early Friday trading after falling to its lowest level in a week, as investors assessed reports suggesting a potential ceasefire agreement in the Middle East. Market sentiment improved after indications that diplomatic progress between the United States and Iran could ease geopolitical tensions and reduce inflationary pressures linked to energy prices.

The dollar rose 0.1% against the Japanese yen to 160.07, while the Australian dollar slipped 0.1% to $0.7045. The New Zealand dollar also declined 0.1% to $0.5830. Meanwhile, the euro remained near a one-week high at $1.1576 following the European Central Bank’s first interest rate increase in three years. The British pound held steady at $1.3414.

Analysts noted that currency markets reversed direction late in the U.S. session after President Donald Trump announced the cancellation of planned military action against Iran, signaling that a peace agreement could potentially be finalized as soon as this weekend. The development weakened the U.S. dollar index and supported risk-sensitive currencies such as the Australian dollar.

Oil markets also reacted positively to the news. Brent crude fell 1.6% to $88.94 per barrel after Trump suggested that a deal with Iran could reopen the Strait of Hormuz, a critical global shipping route. However, Iranian officials stated that no final agreement had yet been reached.

Economic data released Thursday showed U.S. producer prices rose more than expected in May, recording the largest annual increase in three and a half years due to higher energy costs caused by Middle East tensions. Despite the headline increase, investors focused on the softer core Producer Price Index reading, which climbed 4.9% year-over-year, below forecasts of 5.4%.

The lower-than-expected core inflation figure, combined with declining energy prices, helped ease concerns about persistent inflation. As a result, market expectations for future Federal Reserve policy shifted. According to Fed funds futures, traders now see a 63.3% probability of a 25-basis-point rate hike at the Fed’s October meeting.

In Europe, the ECB’s recent rate increase reinforced expectations that policymakers could deliver another hike in September. Economists noted that while the central bank provided limited forward guidance, inflation and growth forecasts remained relatively hawkish, supporting the case for further tightening if price pressures persist.

Cryptocurrency markets also posted modest gains. Bitcoin rose 0.2% to $63,460, while Ether advanced 0.1% to $1,672, reflecting improved risk appetite across global financial markets.