Dollar Strengthens Amid Middle East Tensions and Fed Rate Uncertainty

The U.S. dollar held firm on Wednesday, supported by safe-haven demand as the ongoing conflict between Israel and Iran escalated. Investors remained cautious ahead of the Federal Reserve’s interest rate decision, fueling demand for the greenback.

Israel has intensified strikes on Iran in an attempt to curb its nuclear capabilities, while calling for regime change. The U.S. has increased its military presence in the region, prompting concerns of wider conflict that could impact global energy supplies and trade routes. As a result, the dollar has gained nearly 1% against major currencies like the yen, Swiss franc, and euro since last Thursday.

Although the dollar had dropped over 8% earlier this year amid doubts over U.S. economic strength and protectionist trade policies, it remains a global safe-haven due to its liquidity. Analysts, including NAB’s Rodrigo Catril, suggest that while structural shifts are weakening its dominance, risk aversion still supports the dollar.

On Wednesday, the dollar rose to a one-week high of 145.21 yen. The Swiss franc was steady at 0.816 per dollar, while the euro edged up 0.1% to $1.149. The U.S. Dollar Index remained flat after a 0.6% gain in the previous session.

Higher oil prices—around $75 a barrel—have weighed on the euro and yen, as the EU and Japan are net importers, unlike the U.S., which is a net exporter.

All eyes now turn to the Fed, expected to keep rates unchanged. Investors await its economic outlook, particularly regarding inflation and growth. The Bank of Japan kept rates steady on Tuesday, while central banks in the UK, Switzerland, Norway, and Sweden are set to announce decisions later this week. Meanwhile, Japan's exports fell in May for the first time in eight months, signaling global trade strain.