The US Dollar Index climbs toward 99.50 as renewed Iranian retaliation threats overshadow optimism surrounding a potential US-Iran deal.

The US Dollar Index (DXY) rises toward 99.50 as Iran’s strikes on US military bases reignite tensions between Washington and Tehran. The Islamic Revolutionary Guard Corps (IRGC) warned of stronger retaliation if the US launches further attacks. Meanwhile, markets are increasingly pricing in a hawkish Federal Reserve stance, with the probability of at least one Fed rate hike this year climbing above 50%.

The US Dollar (USD) attracts strong buying interest during Thursday’s Asian session after Iran retaliated against recent US strikes near Bandar Abbas airport, according to Tasnim news agency.

At the time of writing, the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, is up around 0.25% on the day and trading near the 99.50 level. The renewed escalation in US-Iran tensions has boosted demand for safe-haven assets, supporting the USD.

Iran’s Islamic Revolutionary Guard Corps (IRGC) stated that it had launched attacks on US military bases and warned that any further US aggression would trigger an even “more decisive” military response.

The IRGC had previously pledged retaliation following Wednesday’s so-called “defensive strikes” by the US Central Command, which targeted Iranian boats allegedly involved in deploying naval mines.

The renewed military confrontation between Washington and Tehran has sharply weakened hopes for a lasting peace agreement. Iran’s counterattacks have also fueled a strong rebound in oil prices, raising concerns about higher inflation and prompting traders to increase expectations of a more hawkish Federal Reserve (Fed) stance.

According to the CME FedWatch Tool, markets currently see a 43.1% probability that the Fed will keep interest rates unchanged through the year, while the remaining expectations point toward at least one rate hike. This marks a major shift from earlier market expectations that anticipated two rate cuts before the conflict escalated.

Looking ahead, investors are closely watching the release of the US April Personal Consumption Expenditures (PCE) Price Index data at 12:30 GMT. The Fed’s preferred inflation measure is forecast to rise 3.8% year-over-year, compared with the previous reading of 3.5%.