Fears that the Israel-Iran conflict escalates into a regional war are boosting risk aversion and supporting the USD.
Fed Powell's hawkish tone after the monetary policy decision provided an additional boost to the Dollar.
FX volatility might rise later today as liquidity declines wth US markets closed on the Juneteenth holiday.
The Dollar has recovered its safe-haven status amid fears that the Middle East conflict escalates into a regional war with the US intervention. The US Dollar Index (DXY), which measures the value of the Greenback against the world’s most traded currencies, extended gains for the fourth consecutive day, hitting session lows at 98.70 before pulling lower.
US President Trump left the world wondering whether the US will join Israel in its war against Iran, with an ambiguous message. Earlier on Thursday, Bloomberg reported that US senior officials are preparing for the possibility of a strike on Iran, which keeps markets on edge.
The Middle East conflict worsens with no end in sight
Meanwhile, Israel has pounded Iran’s Arak heavy water nuclear reactor, and Iranian missiles hit several sites in Central and Southern Israel, as the war enters its seventh day with no sign of an end in sight.
On Wednesday, the Federal Reserve held interest rates at the current 4.25%-4.50% range and maintained the projections of two more rate cuts in 2025. Chairman Powell, however, curbed investors’ optimism, warning about upcoming inflationary pressures, as the effect of tariffs filters in, and dampened hopes of any near-term rate cut.
The calendar is light today, with US markets closed for the Juneteenth bank holiday. Geopolitical tensions are likely to remain the main market driver, with liquidity declining during the US trading session, which may lead to volatility spikes.
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