The dollar strengthened on Thursday after briefly retreating from three-month highs, as the fallout from war in the Middle East roiled global markets and kept sentiment fragile, bolstering demand for the safe-haven currency, Reuters reported.
Earlier in the session, a towering rally in the dollar was halted as investors clung on to tenuous assumptions that the conflict might not last as long as initially expected and for a resumption of oil shipments through the Strait of Hormuz.
But markets remained at the mercy of the U.S.-Israel war with Iran, now in its sixth day, after Iran launched a wave of missiles at Israel, sending millions of residents into bomb shelters.
That kept the greenback in favour as it quickly reversed early losses to trade higher, leaving the euro down 0.2% at $1.1608 and sterling falling 0.27% to $1.3335.
Against a basket of currencies, the dollar was up 0.2% at 99.00, resuming its climb toward an over three-month high hit earlier this week .
"There appears to be little to no escape. Traditional safe havens, like gold, are not playing their usual part," said Bas van Geffen, senior macro strategist at Rabobank.
"Considering the sharp appreciation of the DXY index, dollar liquidity appears to be king."
The dollar has risen nearly 1.4% for the week thus far, emerging as one of a handful of winners in a volatile few sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.
The spike in energy prices from the Middle East war has stoked fears of a resurgence in inflation that could derail the rate outlooks for major central banks.
Traders are now pricing in just a 34% chance of a Federal Reserve rate cut in June, as compared with a near 46% chance a week ago, according to the CME FedWatch tool, though that has in part been driven by upbeat U.S. economic data on Wednesday.
Rate easing expectations from the Bank of England have also been pared back , while money markets increased bets on European Central Bank rate hikes as early as this year .
"In addition to market participants, it is central bankers who are now increasingly eyeing the return of inflation as a concern," said Thierry Wizman, global FX and rates strategist at Macquarie Group.
"It is the U.S.'s rate outlook that is seen to have the greatest potential to be overturned by another burst of global inflation in 2026, if energy supplies become constrained."
The yen similarly reversed early gains and was last little changed at 157.08 per dollar.
The Australian dollar fell 0.35% to $0.7050, having risen 0.57% in the previous session as the greenback sold off, while the New Zealand dollar was down 0.2% at $0.5930.
The Aussie has swung in a wide range this week, having been used as a proxy for risk sentiment while at times also benefitting from a rare safe-haven bid as the country's energy abundance offset the impact of rising oil prices.
Elsewhere, China set its economic growth target for 2026 of 4.5% to 5% on Thursday, a slight downgrade from the 5% pace achieved last year, which leaves room for greater - although not decisive - efforts to curb industrial overcapacity and rebalance the economy.
The yuan rebounded from a one-month low and was up 0.1% at 6.8904 per dollar, after the People's Bank of China set its guidance at the strongest in nearly three years.
"We believe Beijing will still aim for the upper end of the 4.5-5% range, despite the more pragmatic stance and increased flexibility," said Junyu Tan, regional economist for North Asia at Coface.
"The more conservative growth target should not be interpreted as a shift away from a pro-growth mindset."
In cryptocurrencies, bitcoin and ether fell more than 1% each, paring some of their strong gains from the previous session.
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