U.S. Dollar Slips as FOMC Holds Rates Steady Amid Middle East Tensions

The U.S. dollar index (DXY) declined to a one-week low on Wednesday, dropping 0.48%, following the Federal Open Market Committee’s (FOMC) decision to maintain interest rates at 3.50% to 3.75% in a 9-3 vote. While initially buoyed by a surge in crude oil prices after President Trump pledged a strong response to an Iranian attack on a U.S. base in Jordan, the dollar reversed gains amid dovish signals from the Fed. The decision reinforced expectations that the central bank may pause rate hikes, pressuring the currency.

The FOMC statement noted that economic activity remains robust despite heightened geopolitical risks, with productivity and capital investment described as “strong.” Chair Jerome Powell emphasized the economy’s resilience but cautioned that the Fed will not hesitate to act if inflation persists. Crude oil prices rose over 6% in early trading after Iran’s Islamic Revolutionary Guard Corps (IRGC) claimed responsibility for missile strikes on a U.S. airbase in Jordan and disruptions to tanker traffic in the Strait of Hormuz. The U.S. and Saudi Arabia responded with a joint airstrike on “Iran-aligned targets” in Iraq. Diplomatic efforts to secure passage through the Strait remain stalled, as Iran rejected Oman’s proposal for shared control.

Market participants now assign a 59% probability to a 25-basis-point rate hike at the September 15-16 meeting. The euro rose 0.60% against the dollar, supported by the Fed’s pause, while the yen gained 0.36% amid safe-haven flows triggered by a drop in Japan’s Nikkei index and concerns over intervention risks. The Bank of Japan’s policy rate remains well below the Fed’s, with just a 2% chance of a rate increase at its upcoming meeting.

Gold prices fell 2.40% to a one-week low on Wednesday, pressured by lower carry costs and profit-taking, though they rebounded over $50 an ounce in after-hours trading after the dollar weakened. Silver rose 0.97%, offsetting some losses. The precious metals market also reflects recent ETF outflows, with gold holdings at a 10-month low and silver at a one-year low, though central bank demand—particularly from China’s People’s Bank of America, which recently increased reserves for a 20th consecutive month—remains supportive.

The dollar’s decline underscores the balancing act between geopolitical risks and monetary policy divergence. While the Fed’s pause signals caution, elevated oil prices and supply-chain disruptions continue to fuel inflation concerns, leaving markets on edge for future policy shifts.

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