The US Dollar strengthened sharply during Thursday’s Asian session, May 28, as escalating tensions between the United States and Iran increased demand for safe haven assets. The US Dollar Index (DXY), which measures the Greenback against six major currencies, climbed around 0.25% to trade near 99.50.
Market sentiment turned defensive after reports from Tasnim News Agency stated that Iran launched retaliatory attacks targeting US military positions following recent American strikes near Bandar Abbas airport. The latest developments have renewed fears that the conflict between the two countries could intensify further.
Iran’s Islamic Revolutionary Guard Corps (IRGC) confirmed attacks on US military bases and warned that any additional military action from Washington would trigger a stronger response. The statement came after the US Central Command carried out what it described as defensive strikes against Iranian boats allegedly attempting to deploy naval mines.
The renewed military confrontation has weakened expectations for a lasting diplomatic agreement between the US and Iran. Investors reacted by moving into traditional safe haven assets, supporting the US Dollar while pressuring risk sensitive currencies.
The Australian Dollar was among the weakest performers against the Greenback during the session, while the US Dollar also gained ground against the Euro, British Pound, Swiss Franc, and New Zealand Dollar.
Rising geopolitical tensions also fueled another jump in oil prices, adding to concerns that inflationary pressures could remain elevated globally. Higher energy prices may complicate the Federal Reserve’s path toward monetary easing and could encourage policymakers to maintain a hawkish stance for longer.
According to the CME FedWatch Tool, markets are increasingly pricing in the possibility that the Federal Reserve could keep interest rates elevated throughout the year. Current probabilities show only a 43.1% chance that rates remain unchanged, while the majority of traders now expect at least one rate hike before year end. This marks a significant shift from earlier expectations that the Fed would deliver two rate cuts before the conflict escalated.
Investors are now closely watching the upcoming US Personal Consumption Expenditures (PCE) Price Index data for April, scheduled for release at 12:30 GMT. The PCE report, which is the Federal Reserve’s preferred inflation measure, is forecast to rise by 3.8% year over year, higher than the previous reading of 3.5%.
A stronger than expected inflation report could reinforce expectations that the Federal Reserve will maintain tighter monetary policy, potentially providing additional support for the US Dollar in the near term.
