Asia FX weakens amid Israel-Iran jitters; dollar firm after Fed holds rates

Investing.com-- Most Asian currencies weakened on Thursday amid heightened uncertainty over U.S. involvement in the Israel-Iran conflict, while the dollar firmed after the Federal Reserve remained non-committal to further interest rate cuts. 

Regional currencies slightly deepened their losses after Bloomberg reported that U.S. officials were preparing for a potential strike against Iran by as soon as this weekend, a move that could mark a major escalation in the conflict. 

Washington’s official stance on intervention also remained unclear, amid vague statements from President Donald Trump.

The New Zealand dollar was the worst performer for the day, with the NZDUSD pair down 0.6% after data showed the country’s economy contracted in the first quarter from last year.

The Australian dollar also lagged, with the AUDUSD pair down 0.4% after data showed an unexpected deterioration in the country’s labor market in May. 

Broader regional currencies all weakened, as the Israel-Iran conflict kept markets largely risk-averse, while somewhat hawkish comments from the Federal Reserve saw traders pivot into the dollar. 

The Chinese yuan’s USDCNY pair was flat, while the Singapore dollar’s USDSGD pair rose 0.2%. The Japanese yen’s USDJPY pair hovered around 145.2 yen, seeing limited safe haven demand. 

The South Korean won’s USDKRW pair rose 0.4%, while the Indian rupee’s USDINR pair added 0.2%. 

Dollar firms as Fed holds rates; Powell non-committal to future cuts 

The dollar index and dollar index futures rose 0.2% each in Asian trade, extending overnight gains after the Fed kept interest rates unchanged at 4.5%, as expected.

While the Fed did maintain its projection for at least two more rate cuts in 2025, Chair Jerome Powell reiterated that any more cuts will be largely dependent on economic data.

Powell flagged persistent concerns over higher inflation due to Trump’s trade tariffs, and cut projections for rate cuts in 2026. 

The Fed Chair’s comments saw markets dial down bets that U.S. interest rate cuts were imminent, which supported near-term buying into the greenback. 

Asia FX pressured by Israel-Iran uncertainty

The dollar also benefited from increased safe haven demand, as the Israel-Iran conflict raged on, while traders largely avoided risk-heavy assets in Asia. Stock markets bore a brunt of the selling, while regional currencies weakened.  

Markets remained uncertain over U.S. involvement in the conflict, with comments from Trump on Wednesday offering few clear signals. 

A Bloomberg report said that U.S. officials were preparing for a potential strike against Iran in the coming days, although it was unclear if the plan would go through. Any direct U.S. involvement in the conflict could mark a major escalation, with Tehran having earlier warned against Washington’s intervention.

Israel and Iran continued to attack each other on Thursday, with the renewed conflict now stretching into a seventh day after Israel attacked Iran last week.