The U.S. dollar index (DXY00) climbed to a 1.5-week high on Thursday, ultimately finishing the session up by 0.22%. This upward movement in the dollar is attributed to persistent tensions in the Middle East, which are fueling safe-haven demand for the currency. Additionally, escalating crude oil prices are contributing to increased inflation expectations, a factor that typically supports a hawkish stance from the Federal Reserve and, consequently, bolsters the dollar.
Dollar Supported by Geopolitical and Inflationary Factors
The ongoing geopolitical instability in the Middle East, particularly the conflict between the U.S. and Iran over control of the Strait of Hormuz, is a significant driver of the dollar’s strength. Both nations are reportedly blocking the waterway to gain leverage in ongoing ceasefire negotiations. The U.S. is awaiting a response from Iran before peace talks can resume, while Iran has stated it will not resume negotiations until a U.S. naval blockade on its ports is lifted.
Rising crude oil prices, which jumped by 3% on Thursday, are also playing a crucial role. Higher energy costs tend to push inflation expectations upward. This scenario often prompts central banks, including the Federal Reserve, to consider tighter monetary policy, such as interest rate hikes, which can make a currency more attractive to investors.
Signs of strength in U.S. manufacturing activity further supported the dollar. The April S&P manufacturing PMI expanded at its strongest pace in nearly four years, indicating robust growth in the sector.
Economic Data Creates Mixed Signals
Despite the positive drivers, the dollar’s ascent was tempered by a rise in U.S. weekly jobless claims, which exceeded expectations. Initial unemployment claims increased by 6,000 to 214,000, signaling a slightly weaker labor market than the anticipated 210,000. Furthermore, the March Chicago Fed National Activity Index fell more than expected to a four-month low of -0.20, down from -0.13, indicating a contraction in economic activity.
In terms of monetary policy expectations, swaps markets are currently pricing in a low 1% probability of a 25 basis point rate hike at the upcoming FOMC meeting on April 28-29. The dollar’s longer-term outlook is being influenced by interest rate differentials, with the FOMC expected to cut rates by at least 25 basis points in 2026, while the Bank of Japan (BOJ) and the European Central Bank (ECB) are anticipated to raise rates by at least 25 basis points in the same year.
Global Markets React to Dollar Strength and Oil Prices
The strengthening dollar exerted downward pressure on other major currencies. The EUR/USD pair fell to a 1.5-week low, closing down 0.15% on Thursday. The Eurozone economy, heavily reliant on energy imports, was negatively impacted by the 3% surge in crude oil prices.
Eurozone economic data presented a mixed picture. While manufacturing activity expanded more than anticipated, with the April S&P manufacturing PMI rising to 52.2 (the fastest pace in nearly four years), the services sector contracted. The composite PMI fell to 48.6, marking the steepest pace of contraction in 17 months. New car registrations in the Eurozone, however, saw a significant increase of 12.5% year-on-year in March.
The USD/JPY pair rose by 0.13% on Thursday, with the yen sliding to a 1.5-week low against the dollar. Japan, which imports over 90% of its energy needs, is particularly vulnerable to higher crude oil prices. Japanese Finance Minister Satsuki Katayama’s comments suggested that further yen weakness could prompt intervention in forex markets, with Japanese officials maintaining close contact with their U.S. counterparts regarding speculative moves affecting the yen.
Japanese economic data also showed a divergence, with manufacturing activity expanding strongly (April S&P manufacturing PMI at 54.9, a 3.25-year high), but service sector activity contracting (April S&P services PMI at an 11-month low of 51.2).
Precious Metals Face Headwinds
Gold and silver prices settled lower on Thursday, reaching 1.5-week lows. The rally in the dollar index acted as a bearish factor for precious metals. The higher inflation expectations stemming from the surge in crude oil prices also posed a challenge, as it could lead central banks to tighten monetary policy, which is typically detrimental to non-yielding assets like gold and silver.
However, safe-haven demand provided some support for precious metals amid escalating concerns about the U.S.-Iran conflict and the blockade of the Strait of Hormuz. Uncertainty surrounding U.S. tariffs, domestic political turmoil, large U.S. deficits, and government policy uncertainty continue to underpin demand for precious metals as a store of value.
Recent fund liquidation in precious metals has been bearish for prices. Long holdings in gold ETFs fell to a 4.25-month low by March 31, and silver ETF holdings reached a 7.25-month low on March 27. On the other hand, strong central bank demand, exemplified by China’s People’s Bank of China (PBOC) increasing its gold reserves for the seventeenth consecutive month in March, offers a supportive element for gold prices.
