US dollar moves and commodities swung after the Federal Reserve left interest rates unchanged, while fresh Middle East escalation fueled a sharp rise in crude oil. The dollar index fell to a one-week low and finished down 0.48%, and the knock-on effect lifted risk sentiment in some currency markets even as higher oil prices raised new inflation concerns.
Crude oil jumped more than 6% after strikes and warnings around Iran, with markets weighing how tighter energy-linked inflation could influence central-bank decisions. Investors also kept close watch on upcoming policy meetings, with implied odds shifting in markets for the next US and European rate moves.
Key takeaways
- Dollar index: Down 0.48% to a one-week low after the FOMC held rates steady.
- Catalyst: The Fed’s decision to keep the fed funds target range unchanged, alongside a more than 6% surge in crude on Middle East escalation.
- FX implication: EUR/USD rose 0.60% and USD/JPY fell 0.36% as the dollar weakened, though oil-driven inflation worries capped the move.
- Rates backdrop: Markets continued to price meaningful odds for additional tightening at upcoming Fed and ECB meetings.
- Metals: Gold fell to a one-week low as higher oil fed inflation expectations, though safe-haven demand limited losses amid US-Iran tensions.
What drove the dollar and major FX moves
The dollar weakened after the Federal Open Market Committee kept the fed funds target range unchanged at 3.50% to 3.75% in a 9-3 vote. Three officials—the Cleveland Fed’s Beth Hammack, the Minneapolis Fed’s Neel Kashkari, and the Dallas Fed’s Lorie Logan—voted for a quarter-point increase, signaling some policymakers saw room for additional tightening.
In its statement, the Fed described economic activity as expanding at a “solid pace” but highlighted “elevated uncertainty” linked in part to the Middle East conflict. It also noted inflation remains elevated “in part reflecting supply shocks” that have pushed up prices, especially in energy. Fed Chair Warsh said the economy is showing “impressive resilience” and that policymakers “will not hesitate to act” if inflation stays elevated.
Oil shock added to the macro tension
Despite the Fed’s hold, crude oil surged more than 6% after reported missile targeting and renewed geopolitical risk around US and regional interests. The Islamic Revolutionary Guard Corps said it targeted a US airbase and command center in Jordan with ballistic missiles and claimed it disrupted tankers attempting to transit the Strait of Hormuz. The US and Saudi Arabia also launched a joint attack on “Iran-aligned terrorists” in Iraq after the IRGC directed attacks on US forces and Saudi energy infrastructure.
Diplomatic efforts to reopen the Strait of Hormuz appeared stalled after Iran’s deputy foreign minister said a proposed route that splits control between Iran and Oman would not address Iran’s concerns, including the requirement for Iran to control key portions of any passage. For markets, the immediate takeaway was higher near-term energy risk—typically supportive for inflation expectations and therefore potentially restrictive for future rate relief.
Market reaction across currencies
EUR/USD: The euro rallied to a 1.5-week high, finishing up 0.60%. The move followed the dollar’s slide after the Fed refrained from tightening. However, the euro faced pressure from the same crude oil spike, which can be a headwind for the Eurozone given Europe’s heavy energy import dependence.
A separate data point showed Germany’s import price index eased to 6.1% year over year from 6.8% year over year in May.
USD/JPY: The yen rose after the Nikkei Stock Average dropped to a 2.25-month low, supporting safe-haven demand. Gains accelerated later as the dollar fell further after the Fed decision. The yen’s support also reflects ongoing intervention risk, as Japanese authorities have previously stepped into the foreign exchange market when the yen exceeded 160 per dollar, a level seen earlier in the week.
Still, yen gains were restrained by macro headwinds from higher oil prices, which are generally negative for Japan’s energy-import outlook. The yen also faced pressure from fiscal concerns, including reporting that Japan plans to cut the sales tax on food and drinks to 1% for two years. Interest rate differentials remained a key constraint, with markets pricing only a limited probability of a near-term Bank of Japan rate hike and noting the large gap versus the Fed’s current range.
Precious metals: mixed closes, gold pressured by higher oil and the dollar
Gold and silver settled mixed following the day’s competing forces. August COMEX gold finished down 2.40, while September COMEX silver closed up 0.560.
Gold fell toward a one-week low as crude prices jumped, lifting inflation expectations and increasing the likelihood that central banks may stay restrictive. The precious-metal complex also contended with a longer-running flow backdrop: long holdings in gold ETFs fell to a 10-month low last Monday after reaching a 3.5-year high on February 27, while long silver ETF holdings dropped to a one-year low on July 14 after a 3.5-year high posted on December 23.
However, the selloff was tempered by safe-haven interest as tensions escalated around US-Iran relations. The day’s geopolitical developments—along with President Trump’s statement that the US will “hit Iran hard”—provided support even as the dollar weakened, which later helped lift gold by more than $50 an ounce in post-market trading.
At the same time, central-bank buying continued to underpin the metal. Bullion held in China’s PBOC reserves increased by 480,000 ounces to 75.44 million troy ounces in June, marking the twentieth consecutive month of reserve additions.
Bigger picture: what investors are pricing for next policy steps
Markets continued to factor in potential further tightening. Pricing data indicated a 59% probability of a 25 basis-point Fed hike at the next FOMC meeting scheduled for September 15–16. For the euro area, markets showed a 90% chance of a 25 basis-point ECB hike at its next policy meeting on September 10.
Currency traders also kept an eye on Japan’s next decision. With limited odds for an additional BOJ hike at an upcoming meeting on Friday, USD/JPY direction appeared closely tied to how quickly higher oil prices translate into inflation expectations and how much the Fed’s hold changes the expected path for US yields.
What to watch next: Traders will likely focus on whether oil’s move sustains broader inflation expectations and whether the next steps from the Fed and ECB continue to align with market pricing. Upcoming central-bank communications and additional energy or geopolitical developments could determine whether the dollar remains under pressure or stabilizes, while precious metals may stay sensitive to the interplay between safe-haven demand and inflation-driven rate expectations.
