The dollar gained significant traction on the euro and pound on Tuesday, climbing 0.48% on the former and nearly double that on the latter. However, with the war between Iran and Israel growing and oil prices climbing, the dollar’s gains are likely more to do with its role as a safe haven currency than a sign of economic strength in the US.
This morning brought news that UK inflation fell to 3.4% in May, in line with forecasts. Though the price of food is still climbing. The main drive of the fall was reduced transport costs, so any improvement there may be wiped out by increased oil prices. The growing conflict in the Middle East has already pushed up the cost of petrol in the UK by 0.2p per litre, and analysts say it could rise another 5p in the coming months.
The uncertainty of what is happening in the Middle East and the unpredictability of its impact on the UK economy, especially with US president Donald Trump’s on-again, off-again tariff policy, makes it look more likely that the Monetary Policy Committee will vote against cutting the Bank of England’s interest rate tomorrow.
Retail sales in the US are markedly down. The 1% drop in May is much worse than analysts forecast, and a sign that Trump’s tariff policy may be hitting the US economy hard. Despite this, the dollar grew significantly.
On Monday, with word of a possible ceasefire being brokered between Iran and Israel, oil prices dipped and the stock market soared. On Tuesday, however, as Trump denied any such talk and, instead, called for Iran’s unconditional surrender, stocks were down, the price of oil climbed to a four-month high and the dollar grew in value. This all indicates that the USD’s status as a safe haven currency is holding, despite its instability in recent months.
This afternoon the Federal Reserve Bank will announce its interest rate decision. Trump has put enormous pressure on chair Jerome Powell to cut rates, asking for as much as 1% off, but it seems unlikely any cut will come. It is unclear how Trump will respond to a rate hold.
Meanwhile, in Europe, a survey from Germany revealed a huge swelling of positive economic sentiment for the second month in a row. With a strengthening euro, inflation in line with targets and this month’s interest rate cut, German’s anticipate large economic growth.
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