Dollar Soars on Energy Shock Fears as Fed and ECB Rate Paths Diverge

The US dollar rose to a two-week high on Wednesday as investors sought refuge from the energy shock caused by the escalating conflict between Iran and its Arab neighbors.

The greenback tends to benefit from higher oil prices because the US economy is less exposed to energy shocks than many other major economies, attracting demand at the expense of currencies such as the euro and yen.

Most economists expect the European Central Bank to be near the end of its tightening cycle after next week's rate hike, while the Federal Reserve is confronting a growing risk of having to tighten policy in 2027.

Schroders senior economist George Brown said that this should widen rate differentials in favor of the dollar and lead to a weaker euro, flagging that Schroders is positioned for a softer euro and expects it to fall to $1.10 against the dollar by year-end.