The U.S. dollar hovered near a 1-1/2-week high on Thursday as renewed hostilities in the Middle East and limited progress on peace negotiations pushed crude above $100 per barrel and dented investor risk appetite.
Markets reacted after Tehran seized two ships in the Strait of Hormuz on Wednesday, in a development that followed a decision by U.S. President Donald Trump to extend a ceasefire with Iran indefinitely. There was no sign that formal peace talks would resume, and the two sides remained at odds over the ceasefire, the blockade, nuclear questions and control of the strait.
With the strategic waterway effectively closed, traders and analysts said the interruption to shipments had translated quickly into an energy shock felt across global economies.
Currency moves tracked the increased risk. The euro was trading at $1.1712, after earlier slipping to its weakest level since April 13. The single currency is set for a weekly decline of about 0.4% - its first drop in four weeks. Sterling was changing hands at $1.3497.
Major commodity-linked currencies held relatively steady. The Australian dollar was at $0.7165, close to the four-year high it reached last week. The New Zealand dollar traded at $0.59045.
Against the yen, the dollar eased slightly, down 0.02% at 159.48 yen. The broader U.S. dollar index, which tracks the currency against six major peers, stood at 98.644, near its highest reading since April 13. The index is tracking a moderate weekly gain of roughly 0.4% after two consecutive weekly declines.
Market dynamics have shifted over recent weeks. In March, the dollar rose on safe-haven flows when the war erupted. That advance was largely given back at the start of this month when hopes for a ceasefire and a possible peace agreement supported a risk-on rebound. The recent flare-up has restored some of those earlier safe-haven dynamics.
Skye Masters, head of markets research at National Australia Bank, warned that risks remained elevated. "Despite Trump’s ceasefire extension, tensions remain elevated with Iran refusing to reopen Hormuz while U.S. naval blockades persist, raising the risk of prolonged supply disruption," she said. Masters added that tail risks were under-priced and that inflationary pressures were likely to persist well into the end of the year.
The nearly two-month conflict has pushed fuel prices sharply higher, eroded consumer confidence to record lows and removed market expectation for rate cuts this year.
A Reuters poll of economists indicated the U.S. Federal Reserve would wait at least six months before cutting interest rates this year, as the energy shock driven by the conflict renews upward pressure on already elevated inflation.
Investors were preparing for fresh U.S. economic data later on Thursday, with attention on weekly initial jobless claims and purchasing managers' indices for clues about whether the surge in energy costs is filtering through to the wider economy.
Market takeaway: Heightened geopolitical tensions, constrained oil flows through a strategically vital waterway and persistent inflationary risks are keeping the dollar supported and leaving markets cautious ahead of key U.S. data releases.