US Dollar Pauses Rally as Middle East Tensions Support Safe-Haven Demand

The U.S. dollar edged lower on Wednesday after reaching its strongest level in more than a week, but persistent geopolitical risks and surging oil prices continued to support demand for the greenback. Investors remained focused on the escalating conflict between the United States and Iran, which has fueled concerns over global energy supplies and inflation.

The U.S. Dollar Index slipped slightly to 101.13 after recent economic data suggested inflation had eased, giving the Federal Reserve more flexibility on interest rates. Softer consumer and producer inflation readings, weaker gasoline sales, and improving consumer sentiment had briefly reduced expectations for additional monetary tightening.

However, renewed tensions in the Middle East have revived inflation concerns. The U.S. and Iran have exchanged strikes for eleven consecutive days, disrupting shipping through the Strait of Hormuz while threats to the Bab el-Mandeb Strait have added to fears of supply shortages. Brent crude briefly climbed above $95 per barrel, its highest level since June, boosting demand for safe-haven assets.

President Donald Trump warned that any Iranian attack on vessels in the Strait of Hormuz would prompt U.S. strikes on Iranian bridges or power plants. Tehran responded by warning it would target regional infrastructure linked to American interests if such attacks occurred. Meanwhile, Secretary of State Marco Rubio said the U.S. remains open to diplomacy, although Iran has shown little willingness to negotiate.

In currency markets, the British pound steadied near $1.3373 after UK inflation slowed to 2.6% in June from 2.8% in May, easing concerns despite political uncertainty under newly installed Prime Minister Andy Burnham. Investors also monitored UK government bond yields following Burnham’s comments on fiscal policy.

The Japanese yen recovered modestly from a 40-year low, trading near 163.14 per dollar as markets watched for potential intervention by Japanese authorities. Meanwhile, the euro gained 0.1% to around $1.1410 ahead of the European Central Bank’s policy meeting. While the ECB is expected to keep interest rates unchanged, investors will closely watch President Christine Lagarde’s comments for clues on how higher energy prices could influence future monetary policy.