Dollar Surges As Markets Fret About Iran Impasse, Inflation

(RTTNews) - The U.S. Dollar rebounded and rallied emphatically against major currencies during the week ended May 15 as the Middle East conflict drifted farther from a diplomatic resolution, bolstering safe haven demand for the U.S. dollar. The greenback was also lifted by the war-led and fuel-driven inflation spike that threatened to goad the Federal Reserve towards a hawkish monetary policy stance.

During the week, the U.S. dollar inter alia rallied against the euro, the British pound, the Australian dollar, the Japanese yen, the Swedish krona, the Canadian dollar and the Swiss franc. The 6-currency Dollar Index jumped a little less than one and a half percent over the course of the week. Here is a quick recap of the dollar's trajectory during the week ended May 15.

During the week, which witnessed an escalation in geopolitical tensions in the Middle east as well as key economic data releases from the U.S., the dollar rallied strongly. The Dollar Index (DXY), a measure of the Dollar's strength against a basket of 6 currencies climbed from the low of 97.85 recorded on Monday to the high of 99.32 recorded on Friday.

Data released by the U.S. Bureau of Labor Statistics on Tuesday showed headline annual consumer price inflation rising to 3.8 percent in April from 3.3 percent in the previous month, surpassing expectations of 3.7 percent. The core component thereof recorded 2.8 percent, higher than 2.6 percent in March and exceeding 2.7 percent that the markets had expected. On a month-on-month basis, inflation declined as expected to 0.6 percent. The core component thereof which was seen edging up to 0.3 percent from 0.2 percent in March however rose to 0.4 percent.

Data released by the U.S. Bureau of Labor Statistics on Wednesday showed headline annual producer price inflation rising to 6 percent in April from an upwardly revised 4.3 percent in March. Markets had expected it to rise to 4.9 percent only. The core component thereof recorded 5.2 percent versus 4.3 percent that markets had anticipated. On a month-on-month basis, headline producer price inflation registered 1.4 percent, sharply higher than 0.5 percent that markets had factored in. The core component also heavily surpassed 0.3 percent that markets had considered, to jump to 1 percent.

The spike in inflation, both at the factory gate as well as at the consumer's end, to levels that the market had not anticipated sharply dampened rate cut expectations from the Federal Reserve, thereby lifting the dollar.

According to the CME Fed Watch tool that tracks the expectations of interest rate traders, the likelihood of the Fed rate falling below the current level of 3.50-3.75 percent by the end of 2026 dropped to 0.6 percent on Friday from 3.7 percent on Monday.

At the same time, the probability of the rates rising to 3.75-4.00 percent by the year-end increased to 39.1 percent on Friday from 21.5 percent on Monday. The pivot in rate expectations from the Fed reflected in a deep sell-off in bond markets and a massive spike in bond yields during the week.

Amidst the developments, the Dollar Index which had closed at 97.90 on May 8, finished trading at 99.28 a week later. The index added 1.41 percent during the week ended May 15.

As rate hike worries and safe haven bids boosted the greenback, the EUR/USD pair plunged 1.36 percent in a week. During the week ended May 15, the EUR/USD pair dropped to 1.1626, from 1.1786 a week earlier as the region worried about the energy price shock and an inflationary spiral. The pair ranged between a weekly high of $1.1792 recorded on Monday and a weekly low of $1.1617, recorded on Friday.

The week ended May 15 also witnessed the pound plunging 2.27 percent against the dollar. The sterling, which had closed at $1.3634 on May 8 declined to $1.3325 by May 15 as political and fiscal concerns also dragged down the sterling. The GBP/USD pair traded between a high of 1.3655 touched on Monday and a low of 1.3314, recorded on Friday. Preliminary estimates released during the week had shown the U.K. economy expanding by 1.1 percent year-over-year in the first quarter of 2026, rising from 1 percent in the previous quarter and surpassing market expectations of 0.8 percent.

Swayed by the Dollar's resurgence, the Aussie also plummeted against the U.S. Dollar during the week ended May 15. The slippage for the AUD/USD pair during the week was around 1.3 percent, from 0.7247 on May 8 to 0.7151 on May 15. The pair traded between the week's high of 0.7272 recorded on Wednesday and the week's low of 0.7139 recorded on Friday.

The Japanese yen also plunged 1.3 percent against the U.S. dollar during the week ended May 15. The USD/JPY pair which had closed at 156.67 on May 8, jumped to 158.77 in a week's time. During the week, the pair ranged between 156.45 touched on Monday and 158.86 recorded on Friday even as officials warned about speculating on the yen and markets suspected intervention by the government to limit the yen's slide.

Sentiment in the currency market remains nervous as concerns grow over the escalating U.S.-Iran tensions as well as the jump in crude oil prices. Anxiety ahead of the release of the FOMC minutes on Wednesday has also swayed sentiment. The six-currency Dollar Index touched a high of 99.35 earlier in the trade, versus the previous week's high of 99.32. It has however eased to 99.09 now. The index had closed at 99.28 on Friday.

With the dollar cooling after a surge in the previous week, the euro and the pound have rebounded. The EUR/USD pair has rallied to 1.1646 from 1.1626 at close on Friday. The GBP/USD pair has also strengthened to 1.3389 from 1.3325 at the end of the previous week. The AUD/USD pair which was at 0.7151 at close on Friday has moved up to 0.7166 as markets wait for the minutes of Reserve Bank of Australia's meeting. The USD/JPY pair has also gained, rising to 158.82 from 158.77 at close on Friday ahead of Monday's update on first quarter GDP.