Dollar steadies as Iran tensions offset soft inflation data

The US dollar held broadly steady on Wednesday after renewed American military strikes on Iran provided safe-haven support that offset a sharp selloff triggered by softer-than-expected inflation data the day before. The greenback had posted its biggest single-day decline in nearly two weeks on Tuesday after the June Consumer Price Index came in well below forecasts, but geopolitical tensions in the Middle East limited further losses.

Inflation Undercut Hawkish Expectations

The Bureau of Labor Statistics reported Tuesday that the CPI fell 0.4% on the month in June — the largest monthly decline since April 2020 — bringing the annual inflation rate down to 3.5% from 4.2% in May. Core inflation, which strips out food and energy, was flat month-over-month, with the annual rate easing to 2.6%. All readings came in below consensus expectations, which had called for a 3.8% annual rate and a 0.1% monthly decline.reuters+2

The dollar index dropped 0.6% on Tuesday following the release, according to CNBC, as the odds of a July rate increase fell to 12% from 42% a day earlier on the CME FedWatch tool. The softer data tempered expectations around Federal Reserve tightening, though markets still priced in roughly 80% odds of at least one rate hike before year-end.cnbc

Iran Conflict Caps Dollar Losses

The greenback's decline was short-lived. The United States carried out attacks on Iran for a third consecutive night late Monday, with US Central Command confirming strikes on military targets across locations including Bushehr, Jask, and Bandar Abbas. Iran retaliated on Tuesday by striking UAE-flagged oil tankers in the Strait of Hormuz and US military facilities in Bahrain and Kuwait.aljazeera

Oil prices surged more than 9% on Monday, with Brent crude climbing to about $81 a barrel — its highest since mid-June — as ship crossings through the strait fell roughly 52% between July 10 and July 12, according to tracking firm Kpler. The spike in energy costs reinforced concerns that inflation could reaccelerate, limiting room for the Fed to ease its stance.aljazeera

Conflicting Forces Keep Markets in Limbo

On Wednesday morning, the dollar index was little changed, hovering near 101. President Trump on Tuesday formally threatened to target Iranian civilian infrastructure, including power plants and bridges, if negotiations are not pursued by next week. Analysts noted that the competing forces of softer inflation data and escalating conflict have left currency markets in a holding pattern.longforecast+3

"The softer-than-expected CPI print undercut the Fed's recent hawkish leanings," CNBC reported, though analysts warned the relief may prove temporary with the US-Iran conflict pushing energy prices higher. Investors are now watching for the Bank of Canada's rate decision and Fed Chair Kevin Warsh's continued congressional testimony for further direction.mitrade+1