The U.S. dollar was broadly stable on Thursday, underpinned by renewed geopolitical friction that kept investors leaning toward safe-haven assets. The dollar index, which tracks the currency against a basket of peers including the yen and the euro, held flat at 101.11.
Heightened tensions between Washington and Tehran helped drive a renewed rise in oil prices and added to concerns about inflation. Brent crude futures climbed more than 1.3% to $95.31 a barrel after the U.S. military said it had launched a new round of strikes on Iran and Iranian-aligned Houthi forces claimed they had carried out military strikes on two Saudi oil tankers. The Houthi action, framed as part of a naval blockade of Saudi Arabia, raised the prospect of additional disruption to oil shipments transiting the Red Sea.
Those energy price moves fed into market expectations for U.S. monetary policy. Two-year U.S. Treasury yields rose to a 17-month high on Wednesday amid concerns that higher oil prices could lift inflation and thereby increase the likelihood of further Federal Reserve tightening.
Joseph Capurso, head of international economics and foreign exchange at Commonwealth Bank of Australia, noted the changing backdrop for energy supplies: "What is different from the start of the conflict five months ago is inventories. Lower inventories mean shortages of oil and gas are more likely the longer the conflict continues, exacerbating the negative economic impact of high energy prices which favours the USD."
Currency markets outside the dollar showed mixed reactions to the geopolitical and central bank backdrop. The euro ticked up 0.02% to $1.1412 ahead of a European Central Bank meeting later on Thursday. The ECB was widely expected to keep interest rates unchanged but to signal openness to another rate increase in September, as a fresh jump in energy prices posed an upside risk to inflation.
Other major currencies were softer against the greenback. The Australian dollar dipped 0.1% to $0.6989, while New Zealand’s kiwi eased almost 0.1% to $0.5811. British sterling last changed hands at $1.3373.
The Japanese yen showed little sign of reversing its weakness. The currency edged up 0.02% to 163.1 per dollar, retracing some of its recent losses after news reports suggested Bank of Japan officials were open to raising rates at a faster pace than many economists expect. Reuters also reported that the BOJ remained alert to upside inflation risks that could produce faster rate hikes than markets currently project, according to three sources familiar with its thinking.
Even so, the yen weakened to 163.23 on Tuesday, its lowest level since December 1986, as markets adjusted to a shifting policy backdrop under Prime Minister Sanae Takaichi. That administration has struggled to dispel expectations that it could press the BOJ to delay further rate increases. Japan’s finance minister has repeatedly issued verbal warnings about potential intervention, and Tokyo conducted yen-buying operations in April and May.
Despite those warnings, analysts point to a broader story for the yen’s trajectory: persistent dollar strength and Japan’s still-low interest-rate environment. Tony Sycamore, market analyst at IG Australia, said: "Against the backdrop of rising energy prices and mounting expectations of a more hawkish Fed meeting next week, it appears very unlikely - despite continued threats - that Japanese authorities will intervene until after next week’s FOMC meeting."
Markets are therefore watching two intersecting forces: the immediate impact of geopolitical developments on energy supply and price, and the unfolding central bank calendar. The combination is supporting the U.S. currency while keeping pressure on currencies tied to commodity prices and on those with narrower room for policy tightening.
For now, investors are pricing in the potential for tighter U.S. monetary policy if inflationary pressures intensify, while also weighing the possibility of further disruptions to oil flows in the Red Sea region. The net effect has kept the dollar relatively steady and left the yen near multi-decade lows as policy expectations and geopolitical uncertainty take precedence.