The dollar bounced back Monday as traders sorted through fresh, fragile progress in Middle East peace talks and a weekend of tit-for-tat strikes between the U.S. and Iran. Markets are watching oil, the Strait of Hormuz and central bank moves for cues on where currencies and inflation expectations head next.
The U.S. dollar climbed after ending the prior week slightly lower, reflecting nervous optimism that a deal to reopen the Strait of Hormuz might be near. That hope took hits and gains as new developments shifted risk appetite, forcing traders to reassess how quickly oil and inflation could move. The result was a market that traded in short bursts of safe-haven buying and rapid profit-taking.
Last week’s dip in the dollar index came as investors priced in the potential reopening of the Gulf shipping route, which would ease pressure on oil supplies. Higher oil pushes the inflation outlook up and increases the odds the Fed will act to keep inflation in check. That dynamic has been a key driver of short-term currency flows.
Tensions spiked when Iran’s Tasnim news agency said Tehran would halt mediated message exchanges with the U.S. over attacks linked to Lebanon, rattling markets. Later, U.S. President Donald Trump said he had talked with Iran-aligned Lebanese militia group Hezbollah through intermediaries and won a pledge it would not attack Israel, which blunted some of the dollar’s gains. Those back-and-forths underscore how fragile any progress is right now.
The dollar index was last up about 0.18% near the 99.2 mark after losing roughly 0.4% the previous week. Volatility has been the story: a rally at the conflict’s start driven by safe-haven flows, then a partial pullback as diplomatic moves and headlines created sharp reversals. Traders are clearly split between risk hedging and chasing yield-sensitive positions.
At the start of the Gulf flare-up the greenback benefited from global jitters and the U.S. economy’s limited exposure to the worst of energy-driven inflation, but much of that cushion has faded. As the conflict’s path looks less predictable, the dollar’s role as a safe haven is being tested. Expectations for policy and growth remain central to how long any rally can last.
The euro slipped about 0.26% to trade around $1.1632 while sterling was slightly firmer at roughly $1.3456. If the Strait of Hormuz opens and oil falls, the dollar would likely soften and risk-sensitive currencies could pick up steam, according to market strategists. That means smaller, commodity-linked currencies are in play for outsized moves.
Markets were put on edge after the U.S. military said it struck Iranian air defenses, a ground control station and two drones it judged threatening to ships, following what it called aggressive Iranian actions. Iran’s Islamic Revolutionary Guard Corps then said it targeted a U.S.-used air base in response to an earlier attack on southern Iran. Those tit-for-tat strikes keep dealers cautious and prompt quick adjustments in FX positions.
FED WATCH. Traders increasingly price a Fed move that lifts the policy rate as tighter energy markets ratchet up inflation risk, reversing earlier bets on cuts. A still-resilient jobs market adds weight to the idea that the central bank may pivot to a firmer stance if inflation shows fresh signs of pickup. That scenario supports the dollar unless growth softens sharply.
The monthly U.S. jobs report due Friday could sway the Fed’s near-term path; economists expect a modest payroll gain and steady unemployment. Strong employment would reinforce a hawkish tilt, while any downside surprise would give markets reason to trim rate-hike odds. Either way, that release is a key data point for traders holding short-term currency bets.
Investors are also watching the Bank of Japan as Governor Kazuo Ueda’s remarks could signal whether the BOJ pushes for a rate step up soon. The yen hovered near 159.71 per dollar, close to the psychologically sensitive 160 level that previously triggered intervention, showing how thin the line is between market moves and policy action. “It seems like 160 is where they draw the line,” said Handelsbanken’s FX strategist, reflecting the market consensus on intervention risks.
The Australian dollar traded softer at around $0.7161 while New Zealand’s kiwi slid toward $0.5936, underscoring how commodity-linked currencies respond quickly to swings in oil and risk appetite. In short, the next few sessions look set to remain news-driven, with headlines on diplomacy, military actions and central bank signals dictating the pace. Traders will be juggling geopolitical headlines and macro data as they size positions.
