Dollar Holds Near Recent Highs as Fed Rate Expectations Turn Softer

The US dollar paused just below recent highs on Thursday, with the index slipping 0.1% to 99.576 after its strongest daily gain in a week. The move reflects a market that is still cautious, but less convinced that higher energy prices will be enough to force the Federal Reserve into further tightening.

Fed funds futures now imply a 64.4% chance that rates will remain unchanged through December, up from 60.2% a day earlier. That shift shows how quickly sentiment is adjusting as traders reassess whether the recent inflation pressure linked to geopolitical tensions will prove lasting or temporary.

At the same time, markets remain highly sensitive to developments in the Middle East. Iran said it is reviewing a US proposal to end the conflict, while also making clear that direct talks are not currently on the table. That combination has kept investors cautious, with price action across currencies and equities continuing to react to headlines rather than conviction-driven positioning.

Oil remains central to the policy story. Earlier disruption around the Strait of Hormuz pushed energy prices higher and briefly raised concerns that central banks may need to stay tougher for longer. But as oil prices have started to settle, traders are increasingly questioning whether the inflation shock will persist long enough to justify another round of aggressive tightening. This has softened support for the dollar, even as broader risk sentiment remains fragile.

Diverging central bank expectations are adding another layer of complexity. The euro edged up to $1.1570 after ECB remarks kept the door open to further tightening if inflation remains sticky. Against the yen, the dollar eased to 159.39, while expectations for a Bank of Japan rate move continue to build. Markets are now pricing a 61.9% probability of a hike to 1% at the BOJ’s April 28 meeting.

From a technical perspective, the USDX remains in a consolidation phase below the key 100.30 resistance zone. Support is holding near 99.00, while the broader recovery structure remains intact as longer-term moving averages continue to slope upward. For now, the dollar is still relatively firm, but without a strong catalyst, traders appear reluctant to push it decisively higher.

Explore how shifting Fed expectations, Middle East headlines, and diverging central bank paths could shape the dollar’s next move.