Geopolitical tensions in the Middle East, particularly surrounding Iran's suspension of negotiations with the United States and threats to block the Strait of Hormuz, have fueled safe-haven demand for the US Dollar and pressured risk-sensitive currencies such as the New Zealand Dollar (NZD), Australian Dollar (AUD), and British Pound (GBP) [1][2][3][4]. The US Dollar Index (DXY) traded around 99.20 during Asian hours on Tuesday, building on previous gains and supported by uncertainty over US-Iran peace talks and hawkish US Federal Reserve (Fed) expectations [2]. According to the CME Group's FedWatch Tool, traders are assigning over a 50% chance of a 25 basis point rate hike at the Fed's December meeting, while another source reports a 39% probability, highlighting a discrepancy in market expectations [1][2].
Iran and its "Resistance Front" allies have reportedly established an agenda to block the Strait of Hormuz and activate additional fronts, including the Bab el-Mandeb Strait, as a means to punish Israel and its supporters. Axios reported that Iran deployed additional naval mines in the strait last week, further escalating tensions and effectively shutting down the Strait of Hormuz, a critical chokepoint for global oil and liquefied natural gas supplies [2]. US President Donald Trump, however, maintains that negotiations are ongoing and suggests a memorandum of understanding to reopen the Strait could be reached within the coming week [1][2][3][4].
The NZD/USD pair trades with a negative bias, down around 0.15% for the day, but remains above the previous day's swing low. The downside for NZD is limited by the Reserve Bank of New Zealand's (RBNZ) hawkish shift, projecting a 25 bps rate increase at the July 8 meeting and indicating the Official Cash Rate (OCR) could reach roughly 2.85% by year-end, implying up to three rate hikes [1]. The US Dollar was the strongest against the New Zealand Dollar this week, with a 0.74% gain [1].
The AUD/USD pair softened to near 0.7155, pressured by geopolitical uncertainties and expectations of a Fed rate hike, compared to earlier expectations for a rate cut before the Iran conflict. Reserve Bank of Australia (RBA) board member Ian Harper highlighted persistent inflation concerns, and markets await key economic data releases, including Australia's Q1 GDP and US May Nonfarm Payrolls, expected to show a gain of 85,000 jobs and an unchanged 4.3% unemployment rate [3].
The GBP/USD pair trades in positive territory around 1.3460, but upside is capped by Middle East tensions. UK data showed the US Manufacturing PMI rose to 54 in May, beating expectations. Bank of England (BoE) Governor Andrew Bailey stated the UK central bank is in no rush to raise rates amid Iran war uncertainty and weak UK growth, with money market futures implying one quarter-point hike and a 30% chance of a second [4].
CONCLUSION
Heightened Middle East tensions have driven safe-haven flows into the US Dollar, pressuring risk-sensitive currencies and shaping central bank policy expectations. While the Fed is seen as likely to raise rates, the RBNZ signals multiple hikes, and the BoE remains cautious. Market volatility is expected to persist as geopolitical developments and upcoming economic data releases continue to influence investor sentiment.