US Dollar Holds Firm as Fed Outlook and Iran Tensions Keep Markets on Edge

The U.S. dollar remained steady on Thursday as investors assessed the Federal Reserve’s interest rate outlook following U.S. inflation data that matched expectations. Meanwhile, elevated oil prices and renewed U.S.-Iran tensions added to uncertainty across global markets.

The U.S. Dollar Index traded around 100.03 in early European trading after gaining approximately 0.2% in the previous session. Traders remained cautious as they evaluated whether easing inflation pressures could influence the Fed’s policy decision in September.

U.S. consumer prices increased 0.1% in July, in line with economists’ forecasts. Annual inflation slowed to 3.4% from 3.5% in June. Core CPI, which excludes volatile food and energy prices, climbed 0.2% month-on-month and 2.5% year-on-year.

Following the inflation report, market expectations for a Federal Reserve rate hike in September weakened, with implied odds dropping to roughly 40% from 54% before the data was released. MUFG analysts said the figures could give policymakers room to keep rates unchanged, although the report may not be strong enough to significantly alter existing positions.

Investors are now looking toward upcoming U.S. producer price and retail sales data for additional clues about the Fed’s next interest rate move.

In currency markets, the Japanese yen remained under pressure. USD/JPY traded near a two-week high around 159.40 as investors continued monitoring the currency after Tokyo and Washington confirmed coordinated yen-buying intervention earlier this month. The intervention was aimed at slowing the yen’s decline after it reached its weakest levels in roughly four decades. The Australian dollar also weakened, with AUD/USD falling about 0.2%.

Geopolitical uncertainty provided another source of market volatility. Iran said efforts to revive an interim peace agreement with Washington had made no progress, with both sides accusing each other of failing to meet commitments related to reopening a crucial shipping route.

The tensions helped keep Brent crude oil near $89 per barrel, increasing concerns that sustained energy costs could fuel imported inflation, particularly across Asian economies.