The dollar index slipped back below 100 after briefly touching 100.2 earlier in the session, as traders weighed the latest developments in the Middle East. Sentiment improved somewhat following reports that Iran is drafting a protocol with Oman to monitor shipping traffic through the Strait of Hormuz. Still, volatility is expected to remain elevated amid increasingly confrontational rhetoric from President Trump and as crude prices hover near their highest levels since 2022.
Oil prices jumped after Trump vowed to take more aggressive measures against Iran. The renewed spike in energy costs is stoking fears of an inflationary spiral that could push the Federal Reserve toward a more hawkish policy stance. Earlier this week, Fed Chair Jerome Powell noted that officials may eventually need to respond to the economic fallout from the conflict but stressed that this is not yet the case, arguing that current policy is appropriately calibrated for a wait-and-see approach. Futures pricing suggests markets still expect the Fed to leave the federal funds rate unchanged for the remainder of the year.
