The U.S. dollar traded without a clear direction on Tuesday, as investors shifted their focus to an exceptionally busy week of central bank meetings while uncertainty over the U.S.-Israeli war with Iran — now in its third week — continued to cloud the oil price outlook and inflation trajectory.
The conflict has kept energy markets on edge, with crude futures fluctuating sharply after some vessels managed to sail through the critical Strait of Hormuz in recent days. Brent crude was last trading up around 2% at $89.47 per barrel after earlier volatility that saw prices drop in the previous session.
“If Iran allows ships destined for India, China and South Asia that could significantly reduce the pressure on supply. At the same time Iran can claim to retain control of the Strait traffic,” Mohit Kumar, an economist at Jefferies, noted.
Iran launched fresh attacks on the United Arab Emirates on Tuesday — strikes on U.S. Gulf allies that President Donald Trump said had not been expected — adding to the complexity of the situation.
The Federal Reserve, European Central Bank, Bank of England, and Bank of Japan are all scheduled to announce policy decisions this week, with all four widely expected to keep rates unchanged. However, investors are scrutinizing any forward guidance for clues on how policymakers might respond to the war’s economic fallout.
“I think central banks will closely monitor the development of inflation expectations as a lesson from the previous price shock. And they may also react more quickly than they did after the pandemic,” Antje Praefcke, forex analyst at Commerzbank, said.
Markets have dramatically repriced ECB policy: traders now anticipate almost two rate hikes in 2026 — a sharp shift from the roughly 50% chance of a cut seen before the conflict began. For the Bank of England, easing expectations have collapsed to just a 40% probability of one more cut.
Paul Mackel, global head of forex research at HSBC, observed: “It is a different environment from 2022, with the Russia-Ukraine war beginning. The U.S. dollar had other supportive drivers, including a hawkish Federal Reserve and weaker global growth. These are now missing.”
The euro slipped 0.15% to $1.1490, having hit $1.1409 on Monday — its lowest level since August 2025. HSBC’s Mackel sees euro/dollar potentially testing a 1.10–1.12 range if Gulf energy supply restrictions persist. The U.S. dollar index rose 0.05% to 99.90, having touched 100.54 on Friday — its highest level since May 2025. The Japanese yen weakened to 159.31 per dollar, just shy of the crucial 160 level that has previously triggered verbal and actual intervention.
Bank of Japan Governor Kazuo Ueda reiterated that underlying inflation is accelerating toward the 2% target but stressed the need for solid wage gains. Barclays analysts warned that a dovish BOJ outcome, combined with higher oil prices and a prolonged Hormuz closure, could push dollar/yen toward 160 and then the 2024 intervention zone at 161.
Japan Finance Minister Satsuki Katayama reiterated on Tuesday that the government was prepared to take decisive steps against volatility in foreign exchange and other financial markets.
The Australian dollar was little changed at 0.7074 after the Reserve Bank of Australia raised rates in a close vote, having strengthened briefly to 0.7095 earlier in the session.
The dollar’s position is noted to hinge on its status as the primary safe-haven asset in the current environment, even as gold and Treasuries have shown mixed performance due to inflation concerns. European shares remained under pressure, with the STOXX 600 down 0.7% Wednesday after earlier steep declines. Asian markets were mixed overnight, while U.S. futures traded flat.
The conflict’s duration remains highly uncertain. Trump has indicated the campaign could extend for more weeks. Iran’s leadership has shown no willingness to negotiate. The European Union has called for de-escalation and “maximum restraint,” emphasizing civilian protection.
For now, markets are caught between inflation fears (delaying rate cuts) and growth concerns (from energy shock and supply-chain risks). The dollar’s safe-haven strength reflects this tension, while gold and bonds show mixed behavior. In the coming days — Fed, ECB, BoE, and BoJ decisions, plus U.S. inflation data — will be critical in determining whether the current risk-off mood persists or gives way to stabilization.
However, analysts believe that until clarity emerges on the conflict’s duration and scope, volatility is likely to remain elevated, with energy prices and central bank responses setting the tone for global assets.
