Dollar Struggles as Fresh US Strikes on Iran and Three-Year-High Inflation Unsettle Markets
The U.S. dollar wobbled on Thursday, June 11, as new American strikes in the Middle East undermined sentiment, while a surge in May consumer inflation to a three-year high kept investors uneasy about the Federal Reserve’s monetary policy outlook. The dollar index, which measures the U.S. currency against six major peers, eased to 99.903. canadaUNHCR
Currency markets have been subdued this week, as investors weighed the fragile ceasefire in the Middle East against a renewed cycle of tit-for-tat strikes between the U.S. and Iran, eroding hopes for a near-term peace agreement. canada
The Helicopter Incident and Renewed Strikes
The United States launched strikes against Iran on Tuesday after President Donald Trump said Tehran had shot down a U.S. Apache helicopter in the Strait of Hormuz. U.S. Central Command described the operation as “a proportional response to unjustified Iranian aggression.” The two pilots were rescued safely by a Navy surface drone, Trump confirmed, but the incident immediately shattered the relative calm that had settled over markets in the days prior. Gomarkets
Iran’s Foreign Minister Abbas Araqchi did not directly address the incident but said foreign forces in the region risked being involved in accidents or crossfire. Iran subsequently launched retaliatory strikes against American bases across the Middle East. Gomarkets
Trump has repeatedly said Iran and the United States are close to an agreement, though there have been few signs of progress since a tenuous ceasefire took effect in early April. Gomarkets
Inflation at Its Highest in Three Years
U.S. consumer price inflation rose to 4.2% in May — its highest level in three years — in line with market expectations, according to data from the U.S. Bureau of Labor Statistics. The reading, published on Wednesday, confirmed that the energy shock from months of conflict and Strait of Hormuz disruption is feeding through to broader prices. Yahoo Finance
The May CPI data arrived days after figures showed a forecast-busting jump in job creation last month, ramping up bets on the Federal Reserve hiking interest rates for the first time since 2023. Markets currently price in approximately a 70% probability that the Fed will raise its policy rate by 25 basis points at least once before the end of the year, according to the CME FedWatch Tool, with about a 38% chance of a hike arriving as early as September. UNHCRAL-Monitor
The Federal Reserve’s target range currently sits at 3.50% to 3.75%. The next Federal Open Market Committee meeting is scheduled for June 16 to 17. KFGO
ECB Decision and the Euro
The euro bought $1.1553 on Thursday, inching away from the ten-week low it hit last week, but has surrendered most of its gains since the ceasefire was struck in early April. canada
The spotlight fell on the European Central Bank’s policy meeting on Thursday, with the ECB widely expected to raise rates to tackle inflation. Markets had priced in approximately a 91% probability of a 25-basis-point hike at the June 11 meeting, which would take the ECB’s key deposit facility rate to 2.25% — the first such increase since 2023. A Bloomberg survey of economists had projected the ECB would raise rates twice in 2026, with hikes in both June and September, as the Iran war drives inflation higher across the eurozone. canada + 2
Bank of Japan: Hospitalization Does Not Alter Rate Outlook
Bank of Japan Governor Kazuo Ueda has been hospitalised for medical treatment and will miss the June 15 to 16 policy meeting, where the central bank is widely expected to raise interest rates. UNHCR
“We do not expect Ueda’s absence to impact on the BOJ’s policy decision,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “We and the market continue to expect a 25bp rate hike next week.” UNHCR
In other currencies, the Australian dollar was at $0.7006 after touching a nine-week low earlier in the session, while the New Zealand dollar held steady at $0.5797. Sterling traded at $1.33905. UNHCR
Regional and Global Impact
Brent crude rose 1.8% on Wednesday to $91.10 per barrel. The S&P 500 and Nasdaq have fallen 4.5% and 7.1% respectively since hitting record highs on June 2, while the Dow Jones is down approximately 3.2% from its last record high on June 4. FXStreet
The World Food Programme has warned that ripple effects from the Iran war are increasing risks of acute hunger for millions of people worldwide. Acting WFP Executive Director Carl Skau said the prolonged closure of the Strait of Hormuz is sending energy prices and the cost of food soaring globally. MTFX
The U.S. economy is relatively insulated from energy shocks compared with other countries, which is one reason investors have sought the safe-haven dollar during the conflict while selling the euro and the Japanese yen. That dynamic is now complicated by the inflation data, which makes aggressive Fed tightening a real possibility — a scenario that could strengthen the dollar further while pressuring global borrowing costs. UNRWA
Background
The current cycle of market volatility traces back to late February 2026, when U.S. and Israeli strikes on Iran resulted in the death of Supreme Leader Ali Khamenei and the effective closure of the Strait of Hormuz. A ceasefire agreement was announced in early April, causing a sharp drop in oil prices and a brief easing of inflation concerns, but the agreement showed signs of strain almost immediately, with Tehran accusing the U.S. of violations. U.S. headline CPI reached 3.8% in April — its highest since May 2023 — driven by rising energy costs from the conflict, prompting traders to scale back earlier expectations for Federal Reserve rate cuts. The Strait of Hormuz has not fully reopened. United Nations in Europe + 2
What Happens Next
The June 16 to 17 FOMC meeting is the next major scheduled event for currency markets, with the Federal Reserve statement due on June 17. A stronger-than-forecast monthly core CPI print for May could lift the odds of a Fed rate hike as early as September. The ECB decision on June 11 and the BOJ meeting on June 15 to 16 will collectively shape the interest rate differential picture across the world’s three largest currency blocs for the weeks ahead. Any further escalation between Washington and Tehran — or progress toward a signed peace agreement — remains the dominant wildcard for oil prices and the broader inflation picture. KFGOAL-Monitor
