The dollar is rising again on renewed inflation fears

The dollar is rising again on renewed inflation fears

·         Rumours of talks between Iran and the US sent the dollar lower, but not for long.

·         The strength of the Australian economy did not help AUDUSD.

On Wednesday afternoon, a New York Times report suggesting that Tehran had contact with the CIA regarding potential negotiations triggered the sharpest rise in EURUSD in a month. The report prompted traders to reassess the possibility of an earlier easing of tensions in the Middle East. However, the US dollar soon regained strength after Iran denied the claims. The political landscape in Iran has become less cohesive following the deaths of several members of the ruling elite. At the same time, conflicting signals regarding a potential blockade of the Strait of Hormuz are adding further volatility to oil and equity markets.

Regarding the duration of the conflict, Donald Trump's administration is guiding markets towards a 4-5-week timeline. However, investors prefer to play it safe and are using the 2022 template, even though the protracted conflict between Russia and Ukraine disrupted oil and gas supplies to Europe. This drove up global prices and sparked a surge in inflation, including in the US, triggering the most aggressive rate hike cycle in 40 years, which strengthened the US dollar against its peers. 

The Fed is currently in a cycle of rate cuts, but has paused since December. However, the very fact of extending the pause in policy easing plays into the hands of EURUSD bears, given the existing wide yield differential between US and German bonds.

This is especially true given the growing signs of strength in the US economy. Published ADP data showed private sector employment growth of 63,000, the best result since July and above the forecast of 50,000. The ISM Services Purchasing Managers' Index jumped to 56.1, its highest level since August 2022.

Attempts by the greenback's competitors to launch a counteroffensive were nipped in the bud. The Australian dollar was not helped by 2.6% GDP growth in 2025, the fastest in three years. Investors believed that this statistic was already factored into the AUDUSD quote, and the chances of the RBA raising rates in March fell from 37% to 20%. 

In Japan, statements by the central bank's head about his readiness to continue raising rates boosted the yen. However, Kazuo Ueda acknowledged that the armed conflict in the Middle East is negatively impacting the national economy due to rising oil and gas prices, which have played into the hands of medium-term buyers. As a result, USDJPY returned to its daily high of 157.4, which is not far from the upper limit of the trading range of the last two years.

The pound remains under pressure not only against the dollar but also due to geopolitical factors. The risks of political instability, amid the Labour Party's defeat in local elections, are weighing on GBPUSD.

By the FxPro Analyst Team