Escalating conflict in the Middle East, combined with crude oil prices breaching the $100-per-barrel threshold, have fueled a flight to safety, pushing the U.S. dollar higher on Thursday.
The Bloomberg Dollar Spot Index advanced 0.3%, positioning it for its best single-week performance in nearly a month. The greenback strengthened against virtually all major currencies, with the New Zealand dollar posting the steepest losses. Meanwhile, the Swiss franc slumped to its lowest point in over a year, and the yen continued to hover near a roughly 40-year low, briefly touching 163.96 against the dollar during the session.
"With both the yen and the Swiss franc weakening, the dollar remains the biggest winner in the current market environment," said Win Thin, Chief Economist at Bank of Nassau 1982.
Rising oil prices have reignited concerns over inflation, driving U.S. Treasury yields higher and providing additional support for the dollar. U.S. President Donald Trump stated he would hold Iran responsible for any future attacks by Yemen's Houthi rebels on Red Sea vessels, a move that could widen American involvement in the Middle East conflict amid no signs of easing regional tensions.
Attention is now turning to next week's Federal Reserve policy meeting, with some investors anticipating another interest rate hike. "The market is likely front-running dollar longs in anticipation of a hawkish signal from the Fed at the July meeting," said Brent Donnelly, President of Spectra Markets. "If the Fed signals it plans or expects to hike in September, that would be enough to keep the dollar's rally going."
Since taking the helm in May, Fed Chair Walsh has broken from the tradition of using forward guidance to manage market expectations, leaving considerable uncertainty over the outcome of the July meeting. Current pricing in the interest rate futures market suggests a roughly 35% probability of a 25-basis-point rate hike in July. Donnelly added that if Walsh ultimately delivers on the rate increase, the dollar would find further support.
Alex Cohen, a foreign exchange strategist at Bank of America, noted that he expects the dollar to have more room to appreciate through the summer months.
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