Dollar wavers as investors ponder rate outlook, Middle East worries

SINGAPORE - The U.S. dollar wobbled on Thursday as new U.S. strikes in the Middle East undermined sentiment, while a surge in May U.S. consumer inflation to a three-year high kept investors uneasy about the Federal Reserve's monetary policy outlook.

The currency markets have been muted this week, with a renewed cycle of tit-for-tat strikes between the U.S. and Iran eroding hopes for a near-term peace agreement in the Middle East.

The euro firmed a bit to $1.1547, inching away from the 10-week low it hit last week. The spotlight will be on the European Central Bank policy meeting later in the day as it looks poised to raise rates to tackle inflation.

Sterling was at $1.3379. The dollar index, which measures the U.S. currency against six major peers, eased to 99.903 after the U.S. military said it had completed strikes against multiple targets in Iran.

The United States began a fresh round of strikes overnight in Iran as President Donald Trump vowed even more attacks if no peace deal is secured. The latest escalation kept markets jittery, pushing oil prices higher. [O/R]

Still, the market reaction was less volatile than in the past, with the dollar remaining relatively subdued so far.

"We still have a bit of news fatigue in the market. This kind of escalation a few weeks ago would probably have had Brent back up through $100 a barrel and the dollar surging," said Nick Twidale, chief market analyst at ATFX Global.

"It comes down to the markets craving a bit of certainty again," said Twidale. "Is this conflict and closure of the Strait going to be the new status quo ... or another 'negotiating tactic' that brings peace hopes back to the table?"

RATE HIKE JITTERS

While the U.S. Consumer Price Index increased 4.2% in the 12 months through May, the largest gain since April 2023, economists remain of the view that the bar is high for monetary policy tightening.

The so-called core CPI gained 0.2% over the month after rising 0.4% in April, bolstering hopes that the price pressures from the energy shock might be contained.

Traders though have fully priced in a 25-basis-point hike by December, a sharp turn from expectations of two rate cuts this year before the Iran war erupted at the end of February.

Tani Fukui, senior director of global economic and market strategy for MetLife Investment Management, said the inflation print offered some relief, but was not sufficient to shift the market's hiking bias.

The Fed is expected to hold rates steady in Kevin Warsh's first meeting as Fed chair next week, with a strong majority of economists in a Reuters poll predicting that the U.S. central bank will keep rates unchanged for the rest of 2026.

"It is important for Warsh to signal a firm commitment to tackling inflation otherwise the bond market may react negatively," said MetLife's Fukui.

"While he need not signal imminent hikes, he must demonstrate that inflation remains a clear priority."

ECB UP NEXT

A well-telegraphed hike from the ECB is set to come as inflation in the 21-country currency bloc is already above 3%, well in excess of the central bank's 2% target.

But with economic growth in the region weak, economists are split over the case for tighter policy. Sources have told Reuters the ECB is unlikely to commit to further hikes but financial markets are pricing in more rate increases.

"We don't expect their post meeting communication to be hawkish enough to justify current market pricing for more than three 25 bps increases by March 2027," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Meanwhile, the Japanese yen was at 160.52 per dollar, leaving traders on edge about the possibility of official intervention from Tokyo.

Bank of Japan Governor Kazuo Ueda has been hospitalised for medical treatment and will miss the June 15 to 16 policy meeting. Ueda's absence though is unlikely to deter the BOJ from going ahead with a widely expected rate hike next week.

In other currencies, the Australian dollar was at $0.7007 after touching a nine-week low earlier in the session. [AUD/]

(Reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam and Sonali Paul)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published June 11, 2026 at 12:05 AM.