The U.S. dollar hovered near a one-week high on Tuesday as markets reacted to conflicting signals from the Middle East.

Renewed attacks raised concerns over global energy supplies and inflation, while hopes for a temporary ceasefire between the United States and Iran offered some relief.

Dollar Holds Near a One-Week High

The U.S. Dollar Index remained steady at 100.93, after reaching its highest level since July 15 in the previous session.

Across major currency pairs:

• USD/JPY was broadly unchanged at 162.49

• EUR/USD held near 1.1417

• GBP/USD rose about 0.1% to 1.3441

• NZD/USD gained 0.4% to 0.5864

• AUD/USD edged higher to 0.7001

The British pound received support after the United Kingdom’s new prime minister, Andy Burnham, pledged to maintain fiscal discipline.

Middle East Tensions Continue to Drive Sentiment

Markets remain highly sensitive to developments in the Middle East.

Yemen’s Iran-aligned Houthis announced a naval blockade on Saudi Arabia, increasing concerns about potential disruptions to global energy supplies.

At the same time, hopes for de-escalation remained after Iran received a 10-day ceasefire proposal from mediators.

The combination of rising conflict risks and possible diplomatic progress has prevented the dollar from establishing a clear direction.

Treasury Yields Rise on Inflation Concerns

U.S. Treasury yields moved higher as investors assessed whether a sustained increase in oil prices could feed into consumer inflation.

The benchmark 10-year Treasury yield remained elevated at 4.5938%, while the 30-year yield stayed firmly above 5%.

Markets now price in only a 17% probability of a Federal Reserve rate hike next week. However, the probability of a hike at the September meeting has risen to 63%, according to CME FedWatch.

Central Banks Face Renewed Policy Pressure

The European Central Bank is expected to keep interest rates unchanged this week. However, elevated oil prices are increasing expectations that the ECB could raise its deposit rate again in September.

In Japan, government bond yields rose sharply as war-related inflation concerns intensified. Investors are now looking ahead to the Bank of Japan’s next meeting for signs that policymakers may accelerate the pace of rate increases.

Meanwhile, stronger-than-expected inflation data in New Zealand reinforced expectations of further rate hikes.

Conclusion

The U.S. dollar is currently being influenced by two opposing forces: safe-haven demand driven by Middle East tensions and optimism surrounding a possible ceasefire.

In the near term, oil prices, Treasury yields, and central bank policy expectations are likely to remain the main drivers of the dollar’s direction.

Source: Reuters