The dollar edged up, approaching a 1-1/2-week high on Thursday, as tensions between Iran and the U.S. in the Middle East conflict, coupled with stagnation in peace negotiations, pushed oil prices back above $100 per barrel, impacting investor sentiment. On Wednesday, Tehran took control of two vessels in the Strait of Hormuz, heightening tensions following U.S. President Donald Trump’s indefinite extension of a ceasefire with Iran, with no indications of peace negotiations resuming. The two sides continue to be at an impasse regarding a ceasefire, with ongoing disputes over their blockades, nuclear matters, and control of the strait. This situation has resulted in the strategic waterway remaining largely closed, leading to an energy shock that adversely affects economies globally.

Markets are showing growing reluctance to engage in directional bets following the relief rally that was fueled by hopes surrounding the Trump off-ramp in the first half of this month,” Philip Wee noted. Volatility has entered a period of cautious consolidation, characterized by a tense wait-and-see approach. The euro was trading at $1.1699, after reaching its lowest point since April 13 earlier in the session. The single currency is poised for a 0.5% decrease this week, marking its first decline in four weeks. Sterling experienced a decline of 0.1%, trading at $1.3484. The Australian dollar experienced a decline of 0.2%, settling at $0.7147, while the New Zealand dollar saw a decrease of 0.3%, reaching $0.5886. The Japanese yen remained steady at 159.56, approaching the critical 160 threshold regarded by authorities as a potential trigger for intervention.

The Bank of Japan is anticipated to maintain its current interest rates in the upcoming week while indicating a willingness to increase them as early as June. The U.S. dollar index, which assesses the currency relative to a group of six significant counterparts, registered a slight increase at 98.676, approaching its peak level since April 13. The index is poised for a modest 0.5% increase this week after experiencing two consecutive weekly declines. In March, the dollar experienced an uptick due to safe-haven demand following the outbreak of war. However, the potential for a peace agreement and a ceasefire earlier this month triggered a risk-on rally, which diminished many of the greenback’s previous gains.

The ongoing conflict in the Middle East, now nearing two months, has resulted in skyrocketing fuel prices, significantly undermining consumer confidence to unprecedented levels and erasing market expectations for interest rate reductions this year. A poll of economists indicates that the U.S. Federal Reserve is expected to hold off on cutting interest rates for at least six months this year, as energy shocks driven by conflict are exacerbating already high inflation levels. Attention will be directed towards the U.S. weekly initial jobless claims and PMIs set to be published later on Thursday, as these will provide insights into whether the effects of rising energy prices are permeating the wider economy.