The US dollar index hovered near 98.20 in Thursday’s European trade, stabilizing after a decline that began on April 6, as geopolitical risks in the Middle East appeared to ease and Federal Reserve officials reinforced expectations for an extended policy pause.
Strait of Hormuz risks ease, safe-haven bid moderates
Support for the dollar emerged amid concerns over shipping disruptions in the Strait of Hormuz, where a dual blockade has limited traffic through the key energy corridor.
Tensions cooled slightly after reports suggested Tehran could allow vessels to transit via the Omani side of the strait if a security arrangement is agreed. Hints of reduced hostilities in the region, coupled with US President Donald Trump’s remark that the war was “close to over,” tempered expectations for stronger safe-haven demand for the US currency.
Media reports also flagged discussions around a possible two-week extension of the current ceasefire, though Washington has indicated it prefers a more durable settlement rather than rolling short-term deals.
Softer energy prices ease inflation fears
The calmer geopolitical tone, alongside softer energy prices, helped cool inflation concerns and reduced market assumptions that the Federal Reserve might need to raise interest rates further.
Fed officials have signaled they are inclined to leave policy unchanged at the next meeting and potentially through the rest of the year. The central bank’s focus has shifted to how long elevated energy prices will persist and how deeply they will filter into broader inflation.
Cleveland Fed President Loretta Mester said this week that current interest rates are at an “appropriate level,” indicating a willingness to wait before making any adjustments. She highlighted energy costs as a key variable, emphasizing both their peak levels and their duration.
In a separate appearance on April 15, St. Louis Fed President Alberto Musalem said the recent oil price spike tied to Middle East disruptions is likely feeding into core inflation, which he expects to remain near 3% over the year—well above the Fed’s 2% target. He added that the central bank could keep its policy rate in the 3.50%–3.75% range “for some time” as it assesses incoming data.
That guidance has pushed traders away from earlier expectations of imminent rate cuts and toward a scenario where policy stays on hold for longer while the Fed tracks the economic impact of the regional conflict.
Dollar dominance reinforced by higher global trading volumes
The dollar’s commanding role in global finance remains intact and is, by some measures, strengthening.
According to the Bank for International Settlements’ 2025 triennial survey, the US currency was on one side of 89.2% of all foreign exchange trades in a market that now averages $9.6 trillion in daily turnover. That marks a jump from the $6.6 trillion per day recorded in the 2022 survey.
International Monetary Fund data for the fourth quarter of 2025 show the dollar accounted for 56.77% of allocated global foreign exchange reserves, underscoring its status as the world’s primary reserve asset.
The currency’s global reach means it remains highly sensitive to shifts in US monetary policy and energy markets, with changes in both often rippling quickly through funding costs, trade flows and risk appetite worldwide.
Implications for dollar-priced assets
A backdrop in which the dollar eases from recent highs while borrowing costs remain steady can reshape how capital is deployed.
For assets priced in dollars that do not generate yield—such as certain commodities or alternative assets—a softer currency and stable rates can remove a key headwind. This environment can improve relative valuations and potentially draw in a broader range of global traders who had previously been deterred by a strong dollar and rising funding costs.
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