US dollar hits 3-month high as geopolitical risks escalate

The dollar climbed to a three-month high on June 3, extending its June rally as escalating Persian Gulf tensions and a better-than-expected ISM Services PMI report reinforced bets on a hawkish Federal Reserve. The greenback gained against all major peers, with EUR/USD slipping below 1.08 and USD/JPY pushing toward 152, while the dollar index rose 0.6 percent on the session.

"Inflation should decline later this year as the effects of tariffs and energy-related shocks begin to fade," Fed Vice Chair Philip Jefferson said Wednesday, while acknowledging that risks to the inflation outlook remain skewed to the upside. Fed Governor Lisa Cook said she is "prepared to raise rates" if inflation fails to moderate in a "timely manner," according to Yahoo Finance. The comments highlight the central bank's dilemma: sticky inflation and a resilient economy argue against easing, while geopolitical risks threaten growth.

The ISM Services PMI beat consensus estimates in June, adding to evidence that the services economy remains resilient even as manufacturing shows signs of weakness. The data followed the Fed's preferred inflation measure accelerating to a three-year high in April, heightening concerns among policymakers that price pressures are becoming more entrenched across the economy. The combination of strong services activity and elevated inflation reduces the case for rate cuts, with fed funds futures now pricing less than 50 basis points of easing through year-end, down from 75 basis points a month ago.

The geopolitical backdrop has darkened considerably. Renewed attacks in the Persian Gulf have raised the specter of a broader conflict involving Iran, threatening shipping through the Strait of Hormuz — a chokepoint that handles about 21 percent of global oil consumption. Brent crude rose above $78 a barrel on the news, while gold held near $2,380 an ounce as investors sought haven assets. The VIX, Wall Street's fear gauge, climbed above 18, reflecting growing anxiety about the economic fallout from a prolonged disruption.

The dollar's rally threatens to tighten financial conditions globally, pressuring emerging-market currencies and commodity prices. A sustained move higher would complicate the Fed's policy path, with markets now pricing a lower probability of rate cuts this year. Policymakers fear that sustained energy disruptions — especially via the Strait of Hormuz — may trigger stagflation, a worst-case scenario for the global economy. The last time geopolitical tensions in the region escalated to a similar degree, in September 2019, the dollar gained about 4 percent over three months while gold surged more than 10 percent and oil spiked 15 percent before retreating as diplomatic channels reopened.

For currency markets, the implications are stark. EUR/USD broke below its 200-day moving average, a technical signal that could accelerate selling toward the 1.06 level. GBP/USD fell toward 1.25 as the Bank of England faces its own inflation challenge, with UK services CPI running above 5 percent. USD/CAD pushed above 1.38, driven by the dual headwinds of a stronger dollar and lower oil prices in local-currency terms. USD/JPY approached 152, a level that has previously triggered intervention warnings from Japanese officials and could prompt the Ministry of Finance to step in.

Despite the macro headwinds, equity markets have shown surprising resilience. The tech-heavy Nasdaq-100 surged more than 10 percent in May, and Goldman Sachs raised its S&P 500 year-end target to 8,000 from 7,600, citing upgraded earnings estimates. Ben Snider, chief US equity strategist at Goldman Sachs Research, projects S&P 500 earnings per share of $340 in 2026, a 24 percent increase from the prior year, and $385 in 2027, representing 13 percent growth. However, policymakers caution that real economic impacts — especially supply disruptions — may emerge with a lag, making it difficult for central banks to set clear policy paths. The divergence between resilient risk assets and deteriorating macro conditions may prove unsustainable if geopolitical tensions continue to escalate.

This article is for informational purposes only and does not constitute investment advice.