Dollar holds firm as fed rate expectations shift and Middle East tensions cloud outlook

The US dollar steadied near recent highs in early Asian trading on Thursday as investors recalibrated expectations for US monetary policy and monitored geopolitical developments linked to the ongoing Middle East conflict.

The US dollar index, which tracks the currency against six major peers, climbed 0.5% to 99.641, marking its strongest one-day advance in a week as markets reacted to persistent uncertainty surrounding the conflict and its potential economic fallout.

Currency movements were mixed across major pairs. The dollar was largely unchanged against the Japanese yen at 159.41, hovering near its strongest level since 2024, while the Australian dollar slipped 0.1% to $0.6943 and the New Zealand dollar held steady at $0.5806. The euro stabilised at $1.1560 after recent declines, and the British pound remained broadly flat at $1.3365.

Market sentiment shifted following disruptions to energy flows through the Strait of Hormuz, which triggered a spike in global energy prices and prompted traders to reassess inflation risks. Analysts said the resulting uncertainty has increased confidence that the Federal Reserve may hold interest rates steady for the remainder of the year.

Futures pricing reflected the shift in expectations. According to data from the CME Group FedWatch tool, markets are assigning a 70.6% probability that the central bank will keep policy unchanged at its December meeting, up from 60.2% a day earlier.

Geopolitical signals remained mixed. Iran said it was reviewing a US proposal aimed at ending the conflict but reiterated that it had no intention of entering negotiations at this stage. Meanwhile, the United Nations Security Council is considering a resolution addressing the potential use of force in the Hormuz region.

Separately, diplomatic engagement between the world’s two largest economies also drew attention. US President Donald Trump said he would meet Chinese President Xi Jinping on May 14–15 during his first visit to China in eight years, after earlier travel plans were delayed by the conflict.

In digital asset markets, cryptocurrencies posted modest gains, with bitcoin rising 0.4% to $71,247.25 and ether edging up 0.2% to $2,170.88, reflecting cautious risk sentiment among investors.