Dollar Weakens as Fed Officials Weigh Middle East Risks and Policy Outlook

Investors and forex traders are focusing on comments from US Federal Reserve officials regarding economic changes following the escalation of the Middle East crisis. Yesterday, Minneapolis Federal Reserve Bank President Neel Kashkari noted that the conflict with Iran has increased uncertainty about the regulator’s next steps. While he had previously expected at least one interest rate cut this year, he now believes it is necessary to take a wait-and-see approach to assess the impact of the military conflict on the economy.

Kansas City Fed President Jeffrey Schmid stated that he does not support a dovish stance, noting that the labor market remains balanced and inflation has exceeded the 2.0% target for five consecutive years. At the same time, he expressed optimism about GDP dynamics and confidence that the new tax reforms planned by the White House will support economic recovery. Only New York Fed President John Williams suggested that monetary policy easing could be considered if the consumer price index continues to decline steadily toward the 2.0% target. He also forecast GDP growth of around 2.5% this year, supported by fiscal stimulus measures, favorable financial conditions, and strong investment in artificial intelligence. However, he acknowledged that higher trade tariffs have significantly accelerated inflation, which is felt primarily by US consumers rather than foreign manufacturers. At 21:00 (GMT+2), traders will await the publication of the Federal Reserve’s Beige Book report, which provides updated information on economic conditions across regional economies.

Eurozone

The euro is strengthening against the US dollar but shows mixed performance against the yen and the pound.

Today, business activity data from eurozone countries were released. In February, the EU services PMI rose slightly from 51.8 to 51.9 points, while the composite index remained unchanged at 51.9. In Germany, the bloc’s largest economy, both indicators increased from 53.4 to 53.5 points. Analysts note that the positive momentum remains modest but stable, driven by stronger consumer demand. However, new orders have declined for the fourth consecutive month, while production costs continue to rise. In addition, the eurozone producer price index for January increased from –0.3% to 0.7% on a monthly basis, exceeding forecasts of 0.2%, while on an annual basis it changed from –2.0% to –2.1% against expectations of –2.7%. As a result, inflationary pressure remains close to the target level but could increase due to rising energy prices following the escalation of the Middle East conflict.

United Kingdom

The pound shows mixed dynamics against the euro, yen, and US dollar.

Investors are evaluating February business activity data: the services PMI remained at 53.9 points, while the composite index declined slightly from 53.9 to 53.7 points. This indicates that growth across key sectors remains relatively strong despite rising price pressures and declining employment levels in companies. Meanwhile, Chancellor of the Exchequer Rachel Reeves presented an updated version of the national budget and acknowledged rising risks of accelerating inflation amid the escalation of the Middle East conflict. The Office for Budget Responsibility also released updated forecasts for consumer prices: analysts expect inflation to reach 2.3% this year instead of the previously estimated 2.5%, while the rate is projected to return to 2.0% in 2027 and 2028. Traders note that these estimates were prepared before the escalation of the US–Iran confrontation and therefore do not account for potential increases in oil prices.

Japan

The yen is strengthening against the US dollar but shows mixed dynamics against the euro and the pound.

In February, the services PMI rose from 53.7 to 53.8 points, while the composite index increased from 53.1 to 53.9 points, reflecting continued strengthening across key sectors of the national economy. However, if the Middle East conflict persists, these sectors could face pressure due to the suspension of liquefied natural gas imports from Qatar, for which there is currently no immediate replacement. Meanwhile, Bank of Japan Governor Kazuo Ueda stated that the regulator will continue tightening monetary policy if its forecasts materialize but warned that the US–Iran confrontation could negatively affect global economic growth, requiring policymakers to remain vigilant.

Australia

The Australian dollar is strengthening against the US currency while showing mixed dynamics against the euro, pound, and yen.

Investors are focusing on GDP data: in the fourth quarter, Australia’s economy expanded by 0.8% quarter-on-quarter, exceeding forecasts of 0.7%, and by 2.6% year-on-year compared with expectations of 2.2%, reaching a three-year high. This increases the likelihood of accelerating inflation and, consequently, tighter monetary policy from the Reserve Bank of Australia (RBA). On the other hand, military tensions in the Persian Gulf region could significantly reduce oil supplies, which may negatively affect the country’s economy. February business activity data were also released today: the services PMI declined from 56.3 to 52.8 points, although analysts expected 52.2, while the composite index fell from 55.7 to 52.4 points against expectations of 52.0.

Oil

The initial rise in oil prices has been replaced by a decline due to a combination of opposing factors. On the positive side, prices continue to receive support from Iran’s blockade of the Strait of Hormuz, through which up to 20.0% of global hydrocarbon traffic previously passed, as well as damage to production infrastructure belonging to major OPEC producers. On the other hand, upward momentum is being limited by comments from US President Donald Trump, who instructed the US International Development Finance Corporation (ISF) to provide political risk insurance and financial guarantees for maritime trade in the Persian Gulf. He also suggested that US naval forces could escort oil tankers through the Strait of Hormuz, although analysts remain skeptical about the effectiveness of such measures. Additional pressure on oil prices comes from the latest report by the American Petroleum Institute (API), which showed an increase in fuel inventories of 5.600 million barrels compared with expectations of 2.200 million barrels. At 17:30 (GMT+2), similar data from the US Energy Information Administration (EIA) will be released, and preliminary estimates suggest an increase of around 3.000 million barrels, which could further pressure oil prices.