Dollar’s Strong Rally Takes a Break as Global Currency Markets Stabilize

The U.S. dollar's recent surge paused Thursday, giving relief to other currencies as investors showed cautious optimism about Middle East conflict duration. Markets responded to diplomatic reports despite ongoing uncertainty about the war's economic impact.

Global currency markets experienced a shift Thursday as the U.S. dollar’s recent powerful surge came to a temporary halt, offering breathing room to struggling international currencies amid investor hopes that Middle East tensions might resolve sooner than anticipated.

Market participants found encouragement in reports suggesting Iranian intelligence officials indicated willingness to engage in CIA discussions aimed at ending the conflict, though Tehran later rejected these claims. This development highlighted the sensitive market psychology surrounding a war that has significantly impacted global financial markets.

The dollar retreated from its highest level in more than three months, settling at 98.78 against a collection of major currencies. The euro gained modest ground, reaching $1.1636 after dropping to its lowest point in over three months earlier this week, while the British pound held steady at $1.3366.

“I wouldn’t say it was particularly good news, because Iran came out and kind of dismissed the report, and it is still clearly uncertain how long the war would drag on and the impact of it, but markets have certainly taken a relatively sanguine view,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Kong noted that market confidence also received a boost from positive U.S. economic indicators released Wednesday, revealing that services sector performance jumped to its strongest level in more than three and a half years during February as companies increased inventory levels expecting robust consumer demand.

Nevertheless, the dollar maintained its weekly gains exceeding 1%, standing out as among the few beneficiaries during turbulent trading sessions that pushed down stocks, bonds, and occasionally even traditionally safe precious metals.

Rising energy costs resulting from Middle East warfare have raised concerns about returning inflation that could disrupt interest rate plans for major central banks worldwide.

“Markets have largely traded the Middle East war as an inflation risk,” said Bas van Geffen, senior macro strategist at Rabobank.

“In the case of the (Federal Reserve) and Bank of England that means fewer rate cuts are being priced, but EUR money markets are now pricing in around 40% odds that the (European Central Bank) may have to hike rates before the end of the year.”

The Japanese yen also benefited from dollar weakness Thursday, climbing 0.2% to 156.78 per dollar. The Australian dollar increased 0.14% to $0.7085, building on its 0.57% advance from the previous day, while New Zealand’s currency remained essentially unchanged at $0.5942.

Although typically vulnerable during market uncertainty, Australia’s currency has attracted unusual safe-haven interest this week as the nation’s abundant energy resources helped counter rising oil price impacts.

In Asian markets, China’s offshore yuan strengthened 0.12% to 6.8860 per dollar before mainland trading began. Chinese officials announced an economic growth target of 4.5%-5% for 2026, representing a modest reduction from last year’s 5% achievement, potentially allowing more focused efforts to address industrial excess capacity and economic rebalancing.

Cryptocurrency markets saw Bitcoin and Ethereum each decline approximately 1% after strong overnight gains driven by improved risk appetite.