Dollar Slips to 99.576: Energy Spikes and Geopolitical Tensions Erase Recent Gains

The U.S. dollar surrendered recent gains during Asian trading on Thursday as investors sought clarity on potential de-escalation in the Middle East conflict and scaled back expectations for further U.S. interest rate hikes. Amid persistent geopolitical uncertainty, the dollar index—which measures the greenback against a basket of six major currencies—fell 0.1% to 99.576, following its sharpest daily gain in a week during the previous session. Westpac analysts noted in a research report that markets remain "critically headline-driven," with an intense focus on whether latest diplomatic signals represent a genuine attempt to ease regional tensions.

Following the closure of the Strait of Hormuz, which triggered a surge in energy prices, traders are reassessing inflation forecasts and increasingly bet that the Federal Reserve will maintain its current monetary policy throughout the year. According to the CME FedWatch Tool, there is now a 64.4% probability that the U.S. central bank will hold rates steady in December, up from 60.2% a day earlier. Meanwhile, the yen traded at 159.39 per dollar, near its strongest levels since 2024, as Japanese two-year government bond yields hit a near three-decade high. LSEG data shows a 61.9% chance of a quarter-point rate hike by the Bank of Japan in April.

In Europe, the euro rose 0.1% to $1.1570 after European Central Bank President Christine Lagarde suggested that regional rate hikes remain on the table if conflict-driven energy costs fuel prolonged inflation. The dollar remained stable against the Chinese yuan at 6.905 offshore, following news of a scheduled meeting between President Trump and President Xi Jinping in mid-May. In the cryptocurrency market, Bitcoin edged down 0.2% to $70,815.26, while Ether fell 0.7% to $2,150.80, reflecting a broader cautious sentiment across global financial markets.