Dollar rises as Iran deal doubts cloud outlook

NEW YORK - The dollar rose to a six-week high on Thursday after Iran's Supreme Leader issued a directive that the country's near-weapons-grade uranium must not be sent abroad, hardening Tehran's stance and casting doubt on how close a deal is to end the Middle East war.

That dampened the optimism sparked on Wednesday, when U.S. President Donald Trump said negotiations with Iran were in the final stages.

Prolonged energy disruptions as the war drags on threaten to feed through to core U.S. consumer prices and inflation expectations, potentially pushing the Federal Reserve toward rate hikes.

A stronger U.S. growth outlook adds further weight to the case for tightening, even as other economies face a weaker trajectory and greater exposure to elevated energy costs.

"We're almost three months from the start of the oil shock and typically that's when global growth starts to see a bit of a deterioration, so we're a bit hesitant on global growth exposed currencies," said Noah Buffam, director in FICC strategy at CIBC Capital Markets in Toronto.

Weak PMIs on Thursday underscored that unease, boosting the dollar on the back of its comparatively stronger outlook.

"A lot of them came in below expectations," said Buffam. "Going forward we might see a little bit more growth weakness."

Economic activity in the euro zone shrank at its sharpest rate in more than 2-1/2 years in May, as a war-driven surge in living costs hammered demand for services and firms accelerated layoffs.

Even so, "there is nothing here to put the European Central Bank Governing Council off its plans to raise rates by 25 bps in June, nor anything to ease concerns about the risks of a recession," said Andrew Kenningham, chief Europe economist at Capital Economics.

Elsewhere, British companies are suffering their most widespread drop in activity in over a year, while Japan's manufacturing sector slowed slightly in May and service sector growth ground to a halt for the first time in over a year.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.3% to 99.43, with the euro down 0.34% at $1.1589.

Sterling weakened 0.21% to $1.3402.

In the U.S., data showed that the number of Americans filing claims for unemployment benefits fell last week, pointing to labor market resilience and giving the Federal Reserve room to focus on rising inflation.

The Japanese yen weakened 0.17% against the greenback to 159.19 per dollar.

The dollar's recent rise has pushed the yen back toward the 160 level that prompted Japan's first currency market intervention in nearly two years last month.

The Bank of Japan should raise interest rates at an "appropriate pace" as price pressures from the Middle East war may push underlying inflation above its 2% target, board member Junko Koeda said, bolstering the case for a rate hike as soon as June.

Separately, the Bank of Japan's survey of investors showed some requests to pause its bond taper plan, as sharp swings in bond markets overshadow a review of its quantitative tightening strategy due next month.

(Reporting by Karen Brettell; Additional reporting by Kevin Buckland Lucy Raitano; editing Gus Trompiz)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published May 21, 2026 at 8:24 AM.