Dollar Strengthens on Middle East Uncertainty as Central Bank Decisions Take Focus

The US dollar strengthened on Tuesday, with the US Dollar Index edging up to 98.7 and approaching a three-week high. The move reflects renewed demand for safe-haven assets as escalating tensions in the Middle East and rising oil prices revive concerns over a potential inflationary spiral.

Market sentiment remains highly sensitive to geopolitical developments, particularly as the White House signaled that Donald Trump is expected to respond “very soon” to Iran’s proposal to reopen the Strait of Hormuz. The proposal, however, avoids addressing Tehran’s nuclear program, leaving a key point of contention unresolved and prolonging uncertainty across global markets.

Fed in Focus as Policy Outlook Remains Unchanged

Attention is also turning to monetary policy, with the Federal Reserve beginning its two-day policy meeting. Policymakers are widely expected to keep the federal funds rate unchanged, with current market expectations pointing to no adjustments for the remainder of the year.

The steady policy outlook comes amid persistent inflation risks linked to higher energy prices, reinforcing the dollar’s relative strength against major global currencies.

Global Central Banks Signal Diverging Paths

Beyond the US, major central banks are also in focus. The European Central Bank and the Bank of England are both set to announce policy decisions, with money markets increasingly pricing in potential rate hikes as early as June.

In contrast, the Bank of Japan maintained its accommodative stance, leaving interest rates unchanged. Governor Kazuo Ueda provided limited guidance on the timing of future tightening, contributing to weakness in the yen.

Dollar Gains Broadly Against Major Currencies

The dollar posted its strongest gains against key peers, including the euro, the British pound, and the Australian dollar. The combination of geopolitical risk, stable US monetary policy expectations, and divergence among global central banks continues to support the greenback’s upward momentum.