Dollar Sluggish Amid Market Uncertainty; Federal Reserve Rate Hike Expectations Weaken
By Gregor Stuart Hunter, Singapore – March 26, 2026
The U.S. dollar eased off its recent gains in Asian trading on Thursday as investors grappled with ongoing geopolitical tensions and adjusted their expectations regarding future interest rate hikes by the Federal Reserve. The dollar’s subdued performance reflects market caution amid uncertainty over the escalating U.S.-Israeli conflict with Iran and signals that the Fed may pause on further monetary tightening.
Market Overview
The U.S. Dollar Index, which gauges the greenback’s strength against a basket of six major currencies, dipped 0.1% to 99.576, relinquishing some of the ground it gained the previous day when it recorded its largest single-day advance in a week. Traders remain cautious as developments surrounding the Middle East conflict unfold, with no clear path yet toward de-escalation.
Iran’s foreign minister stated on Wednesday that while Tehran is reviewing a U.S. proposal aimed at ending the conflict, it has no immediate plans to engage in peace talks. This stance contributed to a lack of direction within Asian stock markets, reflecting the broader nervousness pervading financial markets.
Geopolitical Tensions and Impact on Markets
Analysts at Westpac highlighted that markets are currently "decisively headline-driven," with investors closely evaluating whether recent updates signal a genuine move toward easing tensions or simply a new status quo marked by prolonged conflict.
The closure of the Strait of Hormuz earlier triggered a sharp spike in energy prices, raising concerns about inflationary pressures. However, as traders reassess the inflation outlook in light of the geopolitical developments, there is growing confidence that the Federal Reserve will likely maintain its current policy stance without additional rate hikes this year.
Federal Reserve Rate Hike Bets Diminish
The CME Group’s FedWatch tool shows that the probability of the Fed holding rates steady in December has climbed to 64.4%, up from 60.2% the day before. Market participants are signaling a reduced expectation for further tightening in monetary policy.
Mike Houlahan, director at Electus Financial in Auckland, noted, "Lots of people have retreated to the sidelines. If there’s some sort of deal, ceasefire, or truce and the price of oil plunges, the inflation premium that’s currently ramped into rates is gone in 48 hours." He pointed out that the rates market is still reacting to the prior crisis period, during which central banks were surprised by a surge in inflation spurred by post-pandemic government spending.
Adding to the subdued rate hike anticipation, Federal Reserve Governor Stephen Miran remarked on Wednesday that policymakers should look beyond the recent oil shock, which he suggested is a temporary factor holding the economy back. Miran has previously advocated for rate cuts.
Currency Movements
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Against the Japanese yen, the dollar marginally fell 0.1% to 159.39 yen, hovering near its strongest level since 2024. The yield on the two-year Japanese government bond reached its highest point in nearly three decades. Current market data imply a 61.9% chance of a 25 basis-point rate increase at the Bank of Japan’s meeting scheduled for April 28. – The euro stabilized after two days of declines, rising 0.1% to $1.1570. This followed comments from European Central Bank President Christine Lagarde suggesting the ECB might raise interest rates if the Middle East conflict continues to drive inflation higher. Analysts at Societe Generale remarked on a "standoff," noting that a potential ECB rate hike, combined with Fed inaction, could boost the euro.
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The U.S. dollar versus the Chinese yuan remained flat at 6.905 in offshore trading. U.S. President Donald Trump announced he would meet Chinese President Xi Jinping in mid-May, a meeting delayed due to the Iran war.
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The British pound was steady at $1.3365, seeking to avoid a third consecutive day of losses after UK consumer price inflation held at 3.0% in February, remaining above the Bank of England’s target.
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Antipodean currencies showed little movement, with the Australian dollar flat at $0.6950 and the New Zealand dollar steady at $0.5806. ### Commodities and Cryptocurrencies
Energy markets continued to reflect geopolitical tensions, with crude oil prices climbing nearly 3%. Conversely, precious metals fell amid these developments, with gold futures down by 2.44% and silver futures falling 4.57%.
In the cryptocurrency market, bitcoin slipped 0.2% to $70,815.26, while ether decreased 0.7% to $2,150.80, reflecting cautious investor sentiment.
As geopolitical anxieties linger and the Federal Reserve signals a potential pause in interest rate hikes, traders are maintaining a cautious stance, seeking clearer signals before making significant moves. The market remains volatile and closely attuned to developments in the Middle East and central banking decisions over the coming weeks.