The American dollar experienced instability on Thursday following fresh military action by the United States in the Middle East, which weakened market sentiment, while May’s consumer inflation spike to a three-year peak left investors concerned about Federal Reserve policy direction.
Currency trading has remained muted throughout the week as market participants balanced the tenuous Middle East ceasefire against renewed retaliatory strikes between America and Iran, diminishing expectations for an imminent peace settlement.
The euro traded at $1.1553, moving slightly higher from last week’s 10-week bottom, though it has surrendered most advances made since April’s early ceasefire agreement. Market attention will focus on the European Central Bank’s policy session later today, with expectations of rate increases to combat inflation.
The British pound held at $1.33905. The dollar index, tracking the American currency versus six major trading partners, declined to 99.903 following military confirmation of completed strikes on various Iranian targets.
America launched another wave of strikes during overnight hours in Iran, according to military officials, while President Donald Trump promised additional attacks without a peace agreement.
This recent escalation maintained market nervousness, driving oil costs upward. Brent crude climbed more than 2% to reach $95.40 per barrel.
However, market responses showed less dramatic swings than previously, with the dollar staying relatively calm during early Asian sessions.
“We still have a bit of news fatigue in the market, this kind of escalation a few weeks ago would probably have had Brent back up through $100 a barrel and the dollar surging,” said Nick Twidale, chief market analyst at ATFX Global.
“It comes down to the markets craving a bit of certainty again,” said Twidale. “Is this conflict and closure of the Strait going to be the new status quo … or another ‘negotiating tactic’ that brings peace hopes back to the table.”
Despite the Consumer Price Index climbing 4.2% over the 12-month period ending in May—the steepest increase since April 2023—economists maintain that conditions for monetary tightening remain challenging to meet.
Core CPI advanced 0.2% monthly after April’s 0.4% rise, supporting optimism that energy-related price pressures might stay controlled.
James Knightley, chief international economist at ING, noted that labor costs represent corporate America’s biggest expense, and continued wage growth moderation should help reduce core inflation pressures.
“This should all help to keep inflation expectations in check, so while we no longer expect the Fed to cut interest rates this year given improved economic momentum, we don’t expect a rate hike either,” Knightley said.
Market participants have completely factored in a 25-basis-point increase for December, representing a dramatic shift from earlier expectations of two rate reductions this year before the Iran conflict began in late February.
The Japanese yen traded at 160.52 against the dollar, keeping traders alert for potential official intervention from Tokyo.
Bank of Japan Governor Kazuo Ueda has been admitted to hospital for medical care and will be absent from the June 15-16 policy gathering, where the central bank is anticipated to implement rate increases.
“We do not expect Ueda’s absence to impact on the BOJ’s policy decision,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “We and the market continue to expect a 25bp rate hike next week.”
Among other currencies, the Australian dollar traded at $0.7006 after reaching a nine-week minimum earlier in trading. The New Zealand dollar remained stable at $0.5797.
