The US dollar strengthened on Tuesday as investors turned to safe havens amid renewed geopolitical tensions in the Middle East. The US dollar index rose to 98.26, driven by doubts over the sustainability of the ceasefire between the United States and Iran after tough remarks from President Donald Trump.
President Trump described Iran's response to the US peace proposal as "very disappointing", putting the status of the current ceasefire in jeopardy. The situation extinguished market optimism that had previously hoped for a diplomatic end to the two-month conflict in the near future.
As a result of the uncertainty and the ongoing closure of the Strait of Hormuz, Brent crude oil prices surged back above $107 a barrel. The continued rise in energy prices has raised concerns about global inflationary pressures that could dampen global economic growth in the second quarter.
The market is currently in a nervous phase with the US Consumer Price Index (CPI) for April, which is published today. US consumer inflation jumped to an annualised 3.8% in April, beating analysts' expectations and hitting its highest level in nearly three years. The sharp rise was driven by a sharp rise in energy prices due to the ongoing conflict in Iran, with petrol prices now up 28.4% from a year ago.
The Federal Reserve's next move in setting the path for interest rates will depend heavily on this inflation data. Analysts say the dollar's strength is currently more influenced by global risk sentiment and short-term interest rate differentials.
