Dollar holds steady as Iran conflict reshapes Fed rate outlook

Thursday 26 March 2026 - 16:20

By: Dakir Madiha

Dollar holds steady as Iran conflict reshapes Fed rate outlook

The U.S. dollar traded near 99.6 on Thursday. Ongoing war between the United States and Iran drives investors to safe-haven assets. The dollar index rose early in the session amid uncertainty over the conflict and the Strait of Hormuz closure. Iranian forces declared the waterway shut on March 4, disrupting global energy markets.

The dollar gained about 2% over the past month. It benefits from its status as both a refuge currency and the money of a net energy exporter. Traders remain cautious despite signals from Washington of possible talks with Tehran. President Donald Trump said the United States is in discussions with Iran, but Iranian officials denied direct involvement.

Fed rate expectations shift due to conflict-driven inflation pressures. Federal funds futures now show a 78% chance the Federal Reserve will hold rates steady through 2026, per CME FedWatch data. This marks a sharp change from a month ago, when traders saw only a 5.3% probability of no cuts.

The Fed kept its key rate at 3.50% to 3.75% after its March 17-18 meeting. Chair Jerome Powell cited high uncertainty from the Middle East conflict and energy price impacts. Traders now expect no reduction at the late April meeting, with a 10.3% chance of a hike.

The British pound struggled near $1.336 amid dollar strength and stubborn UK inflation data. The Office for National Statistics reported core CPI at 3.2% for the 12 months to February, above the 3.1% forecast. Service sector inflation eased slightly to 4.3% from 4.4%, but the upside surprise clouds Bank of England rate cut prospects.

The euro hovered near 1.16 as interest rate differentials favor the dollar. Analysts say oil prices will likely stay elevated even if peace emerges, due to persistent supply issues. This raises stagflation risks in Europe and caps euro gains.

The Strait of Hormuz standoff remains key to the dollar's path. Iranian officials resist talks on reopening it amid U.S.-Israeli military pressure. Trump issued a 48-hour ultimatum on March 22 to restore the route or face strikes on power plants. Iran warned of full closure if its energy infrastructure is hit. Vitol Group estimates global losses at 70 million barrels per week under current flows.