Market Analysis: Dollar Slips as Iran War Risk Outweighs Strong U.S. Data
Author: Martin Lam
The U.S. dollar experienced a decline on Wednesday, with the Dollar Index (DXY) falling towards 98.80, despite the release of stronger-than-expected U.S. private payrolls and services data. Investors shifted their focus to the inflation and growth risks stemming from the escalating U.S.-Iran conflict and disruptions in the Strait of Hormuz. This geopolitical tension has maintained a strong demand for safe-haven assets like gold, while oil prices remained elevated, and Treasury yields stayed high as traders reassessed the Federal Reserve's potential interest rate cuts.
Market Snapshot
The dollar's decline followed a brief two-day rebound that had seen the DXY approach the 100.00 mark. By the end of U.S. trading, it had retreated to around 98.80. The euro (EUR/USD) recovered to approximately 1.1640, the British pound (GBP/USD) steadied near 1.3370, and the Japanese yen (USD/JPY) slipped to about 156.78-157.00. Gold prices increased by 0.8% to $5,176.69 per ounce, while Brent crude oil remained flat at $81.40 per barrel after reaching $84.48 earlier in the day. U.S. crude oil ended slightly higher at $74.66.
Data Strength vs. Geopolitical Concerns
The initial support for the dollar was driven by robust U.S. economic data. The ADP reported an increase of 63,000 in private payrolls for February, surpassing expectations, while the ISM services PMI rose to 56.1 from 53.8, marking its highest level since July 2022 and exceeding the consensus of 53.5. These figures suggested that the U.S. economy started the first quarter with solid momentum. However, the market's attention was primarily on geopolitical risks, particularly the Iran conflict, which overshadowed the positive economic indicators.
Oil Prices and Inflation Concerns
The ongoing oil shock remains a significant macroeconomic concern. Shipping through the Strait of Hormuz has been effectively halted for five days, and Iraq has reduced its output by nearly 1.5 million barrels per day due to stalled exports. Brent crude oil reached its highest settlement since January 2025, highlighting the rapid impact of the conflict on energy prices and inflation expectations. Consequently, U.S. Treasury yields rose, with the 10-year yield reaching 4.098% and the 2-year yield climbing to 3.551%, as traders adjusted their expectations regarding near-term interest rate cuts.
Policy Implications and Market Outlook
The conflicting signals from economic data and rising energy-driven inflation pose challenges for central banks. While growth appears to be holding up, the intensifying inflation risks from energy prices complicate the policy landscape. The Federal Reserve is still expected to maintain steady rates at its upcoming March meeting, but the timeline for potential rate cuts has been pushed back, with some investors now anticipating the first cut in July or later.
Key Monitors
Traders are now looking ahead to Thursday's U.S. jobless claims and Friday's nonfarm payrolls report, where economists expect a payroll growth of 59,000 and an unemployment rate steady at 4.3%. Additionally, they will monitor any signs of restored shipping flows through the Strait of Hormuz or further supply disruptions, as well as the potential impact of oil prices on inflation and Fed expectations.