The US dollar held near a one-month low on Thursday as investors weighed weaker-than-expected US inflation data, which reduced expectations for interest rate hikes, against the risk of another rise in oil prices due to tensions in the Middle East, which could provide support for the currency.

Lower rate hike expectations weigh on the dollar despite ongoing Middle East tensions

US Treasury yields fell on Wednesday after a second consecutive day of inflation data showed that price pressures continued to ease, weakening expectations for further monetary tightening by the Federal Reserve and limiting support for the dollar.

The US economy is generally viewed as less vulnerable to energy price shocks than many other major economies, making the dollar a preferred safe-haven asset when oil prices rise, often at the expense of the euro and the Japanese yen.

Conversely, any diplomatic breakthrough in the Middle East typically weighs on the dollar against those currencies as lower oil prices improve the outlook for energy-importing economies.

Some investors believe the current escalation with Iran is aimed at strengthening the United States' negotiating position and that tensions could eventually ease once Washington secures greater concessions.

"Markets are also aware that President Donald Trump's threats, strong rhetoric, and deadlines are rarely implemented in full," said Jens Magnusson, Chief Economist at SEB.

"When prices rise too far, particularly oil and gasoline prices, he tends to pull back, allowing prices to decline again," he added.

Oil prices fell on Thursday as investors took profits while continuing to assess the impact of the latest wave of US strikes on Iranian military facilities.

The dollar index, which measures the US currency against a basket of six major currencies, held steady at 100.48, close to its lowest level since June 18. The index has fallen around 0.8% over the previous two sessions and is heading for a weekly loss.

Market expectations for a Federal Reserve rate hike at the July meeting fell to 11%, down from 45% at the start of the week, according to federal funds futures data from CME Group.

However, markets still see an approximately even chance of at least one 25-basis-point rate hike at the September meeting.

The euro was little changed at $1.1469 as investors closely monitored European natural gas futures, which climbed to their highest level since March. The increase raised concerns that higher energy costs could weaken the eurozone economy and limit further gains in the single currency.

Sterling also held near a two-month high at $1.354 following the release of economic data, as investors expect the UK's new prime minister to appoint a finance minister committed to fiscal restraint.

In Asia, the Japanese yen remained close to multi-decade lows as markets focused on potential moves by Japan's Government Pension Investment Fund (GPIF). Japanese Finance Minister Katsunobu Kato said last week that the government wants to achieve a "significant increase" in the fund's investment in domestic assets.

The dollar rose 0.10% against the yen to 162.00, after reaching a multi-decade high of 162.84 earlier this month.

Geoff Yu, Senior EMEA Macro Strategist at BNY, said discussions surrounding the GPIF's strategy indicate that capital allocation by the public sector has become an active economic policy tool rather than merely a long-term objective.

He added that investors should view the shift as a structural, multi-year trend whose impact will extend beyond Japan.

Analysts said the GPIF has the greatest capacity among Japanese investors to influence the foreign exchange market. The fund reviews its investment strategy every five years, with the latest review completed in 2025, while retaining the ability to adjust its asset allocation within its target ranges.

In other currency markets, the Australian and New Zealand dollars each fell around 0.1%, with the Australian dollar trading at US$0.6995 and the New Zealand dollar at US$0.5842.

Gold prices fell in European trading on Thursday, heading for their first loss in three sessions, pressured by a rebound in the US dollar against a basket of global currencies as military tensions between the United States and Iran continued to intensify.

US inflation data released this week reduced expectations that the Federal Reserve will raise interest rates this year, while investors await further evidence on the future path of US monetary policy.

The Price

• Gold prices fell 0.9% to $4,023.06 an ounce, from the opening level of $4,060.45, after reaching an intraday high of $4,066.87.

• At Wednesday's settlement, gold prices rose 0.2%, posting their second consecutive daily gain as the metal continued to recover from a two-week low of $3,983.64 an ounce.

• In addition to bargain buying, gold received support from a weaker US dollar following the release of disappointing economic data in the United States.

US dollar

The dollar index rose 0.1% on Thursday as it attempted to recover from a one-month low, reflecting renewed strength in the US currency against a basket of major and minor currencies.

Demand for the dollar as a safe-haven asset increased as military strikes between the United States and Iran continued to escalate, while reduced shipping traffic through the Strait of Hormuz intensified concerns over possible disruptions to global oil supplies.

Latest developments in the Iran conflict

• The United States launched a new wave of airstrikes targeting Iranian coastal defense sites and missile launchers.

• Iran described the current confrontation as an "existential war" and said it would continue responding to US operations, while threatening to broaden measures that could affect regional energy exports.

• The US fleet, consisting of 20 warships and hundreds of fighter aircraft in the region, continues to intercept vessels traveling to and from Iranian ports.

• The number of ships passing through the Strait of Hormuz fell to just seven, down from 13 the previous day, with no supertankers or liquefied natural gas carriers transiting the waterway.

• US President Donald Trump said Iran "wants to reach a settlement," but stressed that negotiations can only resume if Tehran changes its behavior.

• Iran, meanwhile, maintains that it will not return to any agreements while US military operations continue.

US interest rates

• Data released this week showed that both consumer and producer prices in the United States slowed more than expected in June as energy prices declined.

• Senior Federal Reserve officials welcomed the softer June inflation readings but said more such reports would be needed before concluding that price pressures are genuinely easing.

• Following the data, CME Group's FedWatch tool showed that the probability of the Federal Reserve leaving interest rates unchanged at its July meeting rose from 59% to 90%, while the probability of a 25-basis-point rate hike fell from 41% to 10%.

• The probability of the Fed keeping rates unchanged at its December meeting also increased from 10% to 25%, while the probability of a 25-basis-point rate hike declined from 90% to 75%.

• Investors continue to monitor incoming US economic data and comments from Federal Reserve officials to reassess those expectations.

Gold outlook

Jigar Trivedi, Senior Research Analyst at IndusInd Securities, said gold is declining as continued attacks in the Middle East drive oil prices sharply higher this week, keeping inflation concerns alive.

Trivedi added that June's inflation figures did not reflect the impact of the latest escalation in the US-Iran conflict, as the temporary peace agreement reached last month has effectively collapsed.

SPDR fund

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell by 2.57 metric tons on Wednesday to 1,001.88 metric tons, the lowest level since July 2.

The British pound weakened against a basket of major currencies during European trading on Thursday, pulling back from a two-month high against the US dollar as investors engaged in profit-taking following its strongest daily gain since March, supported by growing optimism over recent political developments in the United Kingdom.

The recent rise in oil prices has intensified inflationary pressure on Bank of England policymakers, reinforcing expectations that UK interest rates could increase in the near term as investors await another round of key economic data.

The Price

• The pound slipped about 0.15% against the US dollar to $1.3520, from the day's opening level of $1.3537, after reaching an intraday high of $1.3545.

• Sterling climbed 1.1% against the US dollar on Wednesday, marking its second consecutive daily gain and its strongest one-day advance since March 19, while reaching a two-month high of $1.3558.

Political developments

• Andy Burnham moved closer to becoming the UK's next prime minister amid growing expectations that the incoming government will pursue a more stable fiscal policy, boosting investor confidence in British assets.

• Reports also suggested that Shabana Mahmood is set to become Chancellor of the Exchequer, a development welcomed by markets, as she is viewed as more fiscally disciplined than some of the other candidates previously considered for the role.

• Investors believe the new UK government is likely to maintain fiscal discipline and limit public spending and borrowing.

US dollar

The US Dollar Index rose 0.1% on Thursday as the greenback attempted to recover from a one-month low against a basket of major currencies.

Demand for the US dollar as a safe-haven asset increased as military exchanges between the United States and Iran continued to escalate, while shipping activity through the Strait of Hormuz remained subdued, heightening concerns over potential disruptions to global oil supplies.

Iran conflict updates

• The United States launched a new wave of airstrikes targeting Iranian coastal defense positions and missile launch sites.

• Iran declared that the current confrontation represents an "existential war" and pledged to continue responding to US military operations while warning that it could expand measures affecting regional energy exports.

• The US naval fleet, consisting of 20 warships and hundreds of military aircraft in the region, continues to intercept vessels traveling to and from Iranian ports.

• Traffic through the Strait of Hormuz declined to just seven vessels, down from 13 the previous day, with supertankers and LNG carriers completely absent from the shipping lane.

• US President Donald Trump said Iran "wants to reach a settlement," but stressed that any return to negotiations would require a change in Tehran's behavior.

• Iran, meanwhile, insists it will not return to any previous understandings as long as US military operations continue.

UK interest rates

Rising oil prices have pushed market pricing for a Bank of England interest rate hike at the July meeting above 35%.

UK economic growth

To reassess those expectations, investors are awaiting the release of UK economic growth data later today, which could influence the Bank of England's monetary policy outlook.

Monthly GDP data is due at 06:00 GMT and is expected to show growth of 0.1% in May, following a 0.1% contraction in April.

The New Zealand dollar weakened against a basket of major currencies during Asian trading on Thursday, pulling back from a four-week high against its US counterpart and heading for its first loss in three sessions as investors locked in recent gains. The move also coincided with a modest recovery in the US dollar amid ongoing military strikes between the United States and Iran.

The recent rally in oil prices has increased inflationary pressure on policymakers at the Reserve Bank of New Zealand, reinforcing expectations that the central bank could raise interest rates at its September meeting.

The Price

• The New Zealand dollar fell about 0.3% against the US dollar to 0.5834, from the day's opening level of 0.5850, after reaching an intraday high of 0.5854.

• The kiwi rose 0.65% against the US dollar on Wednesday, marking its second consecutive daily gain and reaching a four-week high of 58.63 US cents.

• The US dollar remained under pressure against major currencies following another round of weaker-than-expected US inflation data, which further reduced expectations of a Federal Reserve interest rate hike this year.

US dollar

The US Dollar Index rose 0.1% on Thursday as the greenback attempted to recover from a one-month low against a basket of major currencies.

Demand for the US dollar as a safe-haven asset increased as military exchanges between the United States and Iran continued to escalate, while shipping activity through the Strait of Hormuz remained subdued, heightening concerns over potential disruptions to global oil supplies.

Iran conflict updates

• The United States launched a new wave of airstrikes targeting Iranian coastal defense positions and missile launch sites.

• Iran declared that the current confrontation represents an "existential war" and pledged to continue responding to US military operations while warning that it could expand measures affecting regional energy exports.

• The US naval fleet, consisting of 20 warships and hundreds of military aircraft in the region, continues to intercept vessels traveling to and from Iranian ports.

• Traffic through the Strait of Hormuz declined to just seven vessels, down from 13 the previous day, with supertankers and LNG carriers completely absent from the shipping lane.

• US President Donald Trump said Iran "wants to reach a settlement," but stressed that any return to negotiations would require a change in Tehran's behavior.

• Iran, meanwhile, insists it will not return to any previous understandings as long as US military operations continue.

New Zealand interest rates

• Following its latest meeting, the Reserve Bank of New Zealand said that further interest rate increases may be required, although the timing and magnitude of any future moves will depend on incoming economic data, inflation trends, and the strength of economic activity.

• Markets continue to price in a greater than 90% probability of a 25-basis-point interest rate increase at the September policy meeting.

• Investors will closely monitor upcoming New Zealand economic data, including inflation, employment, and GDP figures, for further clues on the policy outlook.