The dollar was headed for its first weekly rise in a month on Thursday, as a stand-off between Iran and the U.S. in the Middle East war and a lack of progress on peace talks sent oil prices back above $100 a barrel and dented investor optimism, Reuters reported.
Tehran seized two ships in the Strait of Hormuz on Wednesday, escalating tensions after U.S. President Donald Trump extended a ceasefire with Iran indefinitely with no sign of peace talks restarting.
The two sides remain divided on a ceasefire, their blockades, nuclear issues and control of the strait, leaving the strategic waterway still effectively shut and triggering an energy shock in a blow to economies across the world.
"For now, at least, it's still feeling as though the path of least resistance is just a maintenance of just adding to dollar positions slightly, so, unwinding that sort of peace premium that had been put back into the market," CIBC Capital Markets head of G10 FX strategy Jeremy Stretch said.
The euro was flat at $1.17, having touched its lowest point since April 13 earlier on. The single currency is headed for a 0.5% decline this week, its first drop in four weeks. Sterling was down 0.1% at $1.3484, shrugging off data that showed an early impact of the U.S.-Israeli war on Iran on British consumers who scaled back their spending on fuel.
The Japanese yen was a touch weaker at 159.56, near the 160 level that many in the market view as the line in the sand for official intervention. The Bank of Japan is expected to keep interest rates unchanged next week, but has hinted that a June hike is possible.
The dollar index , which tracks the performance of the U.S. currency against six others, was a touch higher at 98.60. It is heading for a weekly rise of 0.4%, the first gain in a month.
The dollar emerged as the main beneficiary of the turmoil in March after the war erupted, but the prospect of a peace deal and a ceasefire earlier this month encouraged investors to buy more volatile currencies, which eroded most of those gains.
The nearly two-month war in the Middle East has led to soaring fuel prices, shattered consumer confidence and wiped out market pricing for rate cuts this year.
President Donald Trump on Tuesday said a currency swap with the United Arab Emirates was under consideration, following a report in The Wall Street Journal that suggested the UAE central bank governor had raised the idea of a swap line with U.S. Treasury Secretary Scott Bessent and Federal Reserve officials in meetings in Washington last week.
"In a sense, whenever we see episodes of instability, there are question marks regarding the ability to access credit or finance or liquidity," CIBC's Stretch said. "And clearly, these are nations which are also seeing significant influences in terms of their revenue streams because the flow of directives are being curtailed. So in a sense, it's a precautionary measure which is prudent."
On the rates front, markets show traders see a 25% chance of a cut from the Fed this year, while pricing in two hikes from the European Central Bank in 2026.
"My view remains that the U.S. economy is best-placed to weather this particular storm, even more so if central banks elsewhere - I’m looking at you, ECB - decide to go down the path of tightening policy," Pepperstone strategist Michael Brown said.
"Dollar dips, hence, remain attractive as buying opportunities, especially with the dollar index seemingly reluctant to make a move under the 98 figure for the time being."
Focus will be on U.S. weekly initial jobless claims and PMIs due to be released later on Thursday for clues on whether the impact of soaring energy prices is filtering through to the broader economy.
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