Dollar firms as Middle East tensions send oil higher

TOKYO/LONDON - The U.S. dollar firmed on Thursday after Reuters reported that Iran's supreme leader has issued a directive that the country's near-weapons-grade uranium should not be sent abroad, potentially complicating talks on ending the U.S.-Israeli war on Iran.

The dollar tends to rise when tensions flare in the Middle East, as higher oil prices weigh on oil-dependent economies such as Japan and the euro area, while safe-haven demand for the greenback increases.

The dollar rose 0.2% against the yen to 159.110 yen after falling for the first time in eight sessions against the yen on Wednesday.

U.S. President Donald Trump on Wednesday had said negotiations with Tehran were in the final stages, while also warning of further attacks if Iran does not agree to a deal.

The dollar index has been largely steady so far in May, rising just 0.1%, with broader currency markets relatively calm during the energy price shock in recent weeks.

"The market is already hoping there is going to be a quick deal to bring an end to the conflict," Lee Hardman, senior currency economist at MUFG, said, adding such a scenario would be dollar negative initially.

However, there could be more economic fallout from energy prices, he said, adding: "There's still a significant risk that things will get worse before they gets better."

Elsewhere, Bank of Japan policy board member Junko Koeda added a measure of support for the yen with hawkish comments on Thursday, saying in a speech that the central bank needs to continue to raise rates with underlying inflation already around a 2% target.

The euro was 0.26% down at $1.15935, after dipping on Wednesday to its weakest level since April 7 at $1.1583 before bouncing back.

Economic activity in the euro zone shrank at its sharpest rate in more than two-and-a-half years in May as a war-driven surge in living costs hammered demand for services across Europe and firms accelerated layoffs, surveys showed on Thursday.

"All told, there is nothing here to put the European Central Bank Governing Council off its plans to raise rates by 25 bp in June, nor anything to ease concerns about the risks of a recession," Andrew Kenningham, chief Europe economist at Capital Economics, said, referring to euro area PMI data.

Traders were still fully pricing in two ECB rate hikes and assigning more than a 50% probability to a third tightening move by year-end.

Sterling was down 0.4% against the dollar at $1.34334 after some worse-than-expected PMIs.

The dollar index, which measures the currency against the euro, yen and four other rivals, rose 0.2% to 99.365, down from a peak of 99.472 on Wednesday, the strongest level since April 7.

"The 'safe haven' flows reversed because of positive news about the Iran war," wrote Joseph Capurso, head of FX at Commonwealth Bank of Australia, in a client note.

At the same time, "while the U.S. has domestic political incentives to seek peace, we would not be surprised if President Trump chooses military escalation to gain leverage in negotiations," he said.

Market focus has been on the potential inflationary impact of higher energy prices as the Strait of Hormuz remains largely closed to shipping.

In a note, Commerzbank FX analysts said many central banks may label the inflation shock as transitory should the Strait open in the next few days, but this would be incorrect as it does not take into account loss of purchasing power.

"Consequently, currencies are likely to benefit in countries where the central bank is slower to speak of transitory price spikes but may nevertheless tighten monetary policy," they wrote.

Notes from the Federal Reserve's April meeting, published on Wednesday, revealed officials' intensifying concerns about inflation, with a growing number open to the possibility that they may need to raise interest rates.

Elsewhere, the Australian dollar declined following a surprise rise in the unemployment rate to the highest since 2021, which reduced the case for higher interest rates.

The Aussie slipped 0.4% to $0.7124 as traders pared back bets for Reserve Bank of Australia tightening this year.

"Our call for the RBA to pause in its June policy meeting is now high-conviction," Westpac economist Ryan Wells wrote in a research report.

"Still, the most immediate and pressing concern for the RBA is inflation. We continue to expect that the RBA will resume raising the cash rate when the size and pace of pass-through of the energy price shock is revealed."

Bitcoin fell 0.75% to $77,109.

(Reporting by Kevin Buckland, additional reporting by Stefano Rebaudo; Editing by Jacqueline Wong,Thomas Derpinghaus and Gus Trompiz)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published May 21, 2026 at 6:47 AM.