Dollar Surges Amid Geopolitical Unrest and Central Bank Actions

The dollar rallied on Thursday due to geopolitical tensions and central bank dynamics, hitting a three-week low for sterling before a critical Bank of England decision. The dollar index rose to 104.35, driven by its status as a safe haven asset amidst economic uncertainties and geopolitical crises, including tensions in the Middle East.

The dollar surged on Thursday following a dip earlier in the week, as central banks continued to unsettle currency markets. Sterling hit a three-week low ahead of a closely-watched Bank of England decision.

The dollar index, which measures the currency against six key rivals, rose by 0.29% to 104.35. This increase followed a 0.4% decline the day before, after the Federal Reserve held rates steady but indicated potential rate cuts in September.

Chris Turner, head of global markets at ING, attributed the dollar's strength to ongoing geopolitical tensions and a sluggish global economy, highlighting its role as a traditional 'safe haven' for investors during periods of stress. 'The geopolitical and macro environment globally isn't great,' Turner noted. 'We've still got significant tensions in the Middle East, and manufacturing is in recession across large parts of Europe and Asia.' The assassination of Hamas leader Ismail Haniyeh in Tehran on Wednesday has further escalated Middle East tensions, spurring threats of retaliation against Israel and heightening fears of a broader conflict.

The euro dipped to a three-week low at $1.0782, while other currencies, including the yen and the Australian dollar, also saw fluctuations. Market expectations for rate cuts by the Bank of England are impacting the pound, which dropped 0.57% to $1.2779. Traders currently see a 62% chance of a rate cut from the Bank of England, as derivatives markets indicate. Conversely, Japan's yen remained relatively stable after interventions by Japanese authorities and a narrowing U.S.-Japan interest rate gap.

(With inputs from agencies.)