Dollar Holds Steady as Middle East Peace Talks Fade

• The US dollar remained stable as Middle East peace talks stalled and oil prices rose.
• Brent crude climbed above $104 per barrel while fears around the Strait of Hormuz remain.
• Traders have largely removed expectations for Federal Reserve rate cuts this year.

The US dollar held steady on Tuesday even as hopes for a Middle East peace deal weakened and oil prices climbed higher. Markets are now balancing two opposing forces, i.e., rising geopolitical risk and expectations that central banks will keep interest rates elevated for longer.

Investors grew more cautious after Donald Trump described the Iran ceasefire as “on life support” following Tehran’s rejection of the latest US peace proposal. The comments led to fears that the conflict, which began at the end of February, could continue well into the second half of the year.

The war has already disrupted energy flows across the region and left the Strait of Hormuz operating at minimal capacity. Before the conflict, the waterway handled roughly one-fifth of global oil and liquefied natural gas shipments.

Brent crude rose 0.3% to $104.55 per barrel, while US West Texas Intermediate crude traded near $98.17. Oil markets remain highly sensitive to any headlines tied to the conflict or shipping activity around Hormuz.

Dollar Holds Firm Despite Geopolitical Pressure

Currency markets remained surprisingly calm despite the rise in oil prices and growing uncertainty around diplomacy.

The euro traded near $1.1775 while the British pound held around $1.3602. The US dollar index stayed close to 97.98 as investors avoided aggressive positioning ahead of fresh inflation data and Trump’s upcoming visit to China.

Analysts said the dollar continues to benefit from safe-haven demand, though gains have stayed limited because markets are not yet treating the situation as a full-scale financial panic.

As per Reuters, Christopher Wong, currency strategist at OCBC, said Trump’s rejection of Iran’s proposal helped place a floor under the dollar, but traders still appear cautious about overreacting unless military escalation increases further.

The broader market reaction suggests investors still believe diplomatic stabilization remains possible, even if negotiations currently look stalled.

Related: Rate Hike Concerns Reappear as PIMCO Warns Iran War May Fuel Inflation

Oil Prices Reshape Inflation Expectations

The biggest market impact from the conflict continues to come through energy prices. Higher oil prices are feeding directly into inflation expectations across global markets.

Investors now expect transportation costs, food prices, and production expenses to remain elevated if the conflict drags on and shipping through Hormuz stays restricted.

Interestingly, before the Iran war began, traders expected two Federal Reserve rate cuts this year. Those expectations have now largely disappeared as oil-driven inflation risks grow.

US Treasury yields have already moved higher. The benchmark 10-year Treasury yield held around 4.418% after rising nearly 5 basis points during the previous session.

Related: Trump Retreats From Iran War Goals as Polls and Markets Turn Heavy