Dollar Holds Near Six-Week High as Iran War Fuels Inflation Fears and Boosts Fed Rate Hike Bets

The U.S. dollar remained firm near a six-week high on Wednesday as investors increasingly expect higher interest rates to combat rising inflation linked to the ongoing Iran conflict. Concerns surrounding the Middle East war, elevated oil prices, and global market uncertainty have strengthened demand for the greenback while pressuring major currencies including the euro, pound, and Japanese yen.

Market sentiment has been shaken by fears that the Iran war could continue for an extended period, pushing energy prices higher and fueling inflation worldwide. The selloff in global bond markets intensified, with the yield on the U.S. 30-year Treasury bond climbing to its highest level since 2007. Investors are now closely watching the Federal Reserve for signals on future monetary policy.

President Donald Trump stated that the United States could strike Iran again if necessary, though he also suggested Tehran may seek negotiations to end the conflict. Meanwhile, the Strait of Hormuz remains effectively closed, raising concerns over disruptions to global oil supplies. Brent crude futures traded around $110.8 per barrel, significantly above pre-war levels.

The euro slipped to $1.1608 after touching its weakest level since April, while the British pound traded at $1.3398. Risk-sensitive currencies also weakened, with the Australian dollar falling to $0.7097 and the New Zealand dollar declining to $0.5822.

The U.S. Dollar Index stayed steady at 99.306 and is now up more than 1% in May as traders increase expectations for a Federal Reserve rate hike later this year. According to CME FedWatch data, markets now price in more than a 50% chance of a December rate increase, reversing earlier expectations for rate cuts.

The Japanese yen weakened to 159.03 per dollar, nearing levels that previously triggered intervention by Japanese authorities. Analysts warn that unless U.S. Treasury yields decline, any intervention may only temporarily slow the yen’s depreciation against the dollar.