Recent developments in US-Iran relations and Federal Reserve politics are shaping the outlook for the US Dollar (USD). According to DBS Group Research, oil prices have rallied toward $100 after Iran refused to attend a second round of talks with the US in Pakistan, which initially supported a broad USD rebound. However, this recovery is expected to be restrained as the risk of a re-escalation into conflict is seen as low for now, and volatility may increase as both sides seek leverage in negotiations [1].
Commerzbank's Michael Pfister highlights that the US president announced an extension of the ceasefire with Iran until negotiations conclude, but the ongoing closure of the Strait of Hormuz keeps global inflation risks elevated and the situation volatile. Pfister notes that while EUR/USD is near pre-war levels, the risks are asymmetrically skewed: renewed tensions would likely support the USD more than a deal would lift the Euro, and any escalation could cause a significant drop in EUR/USD [2].
On the Federal Reserve front, both sources discuss the confirmation hearing of Fed Chair nominee Kevin Warsh. Warsh emphasized the importance of central bank independence and stated he made no promises to President Trump regarding lowering interest rates [1][2]. However, DBS suggests Warsh's belief in AI's disinflationary impact could make him favor rate cuts, potentially capping USD upside [1]. Commerzbank adds that the US president expressed disappointment in a recent interview at the prospect of Warsh not lowering rates immediately, and notes ongoing political scrutiny, including a Justice Department investigation into the Fed’s renovation costs and calls for a congressional inquiry [2].
Both sources agree that, despite the current ceasefire and Fed developments, uncertainty and political noise are likely to keep USD issues in focus. Commerzbank concludes that even if the war ends, US Dollar-related challenges are expected to persist [2].
CONCLUSION
The US Dollar's recent gains are supported by geopolitical tensions and oil price increases but are likely to be capped by low conflict risk and expectations of dovish Fed policy. Political uncertainty around the Fed and the Warsh nomination adds to market volatility, suggesting that USD-related issues will remain in focus regardless of developments in the Middle East.