The US dollar edged higher on Thursday as escalating tensions in the Middle East rattled markets and underscored the global demand for safe-haven assets. At the same time, a string of central bank decisions in Europe highlighted the challenges monetary authorities face in managing heightened uncertainty.

The dollar has regained its safe-haven appeal in recent days, buoyed by fears of a wider conflict between Iran and Israel. The two nations exchanged fresh airstrikes on Thursday, marking the seventh day of hostilities. Speculation about possible US involvement has intensified, with President Donald Trump offering little clarity on whether Washington would join Israel’s campaign targeting Iranian nuclear facilities.

Meanwhile, central banks across Europe made cautious moves. The Federal Reserve held interest rates steady on Wednesday, as expected. On Thursday, the Bank of England followed suit, keeping rates unchanged amid lingering global uncertainty and stubborn inflation pressures. Although the pound initially dropped following the announcement, it later recovered much of the loss.

Elsewhere, the Swiss franc strengthened against the dollar after the Swiss National Bank enacted a widely anticipated rate cut. In contrast, the Norwegian krone was rattled by a surprise 25 basis point rate cut from the Norges Bank, which markets had expected to hold. The dollar and euro both jumped by 1% against the krone. Despite the dip, the krone remains one of the year’s best-performing major currencies against the dollar, with an 11% gain year-to-date.

The euro slipped slightly, down 0.1% to $1.1473, while the dollar rose 0.2% against the yen, hitting 145.56.

The dollar index, which tracks the greenback against a basket of six major currencies, remained flat at 98.9 but is on track for a 0.8% weekly gain—its best performance since late February.

According to ING strategist Francesco Pesole, the dollar's strength is bolstered by the fact that current risks—namely geopolitical tensions and higher oil prices—are not driven by US-specific issues, unlike the domestic concerns previously triggered by Trump’s tax policies or tariff threats.

“In this environment, the dollar is still in a more favourable spot than energy-dependent safe-haven alternatives like the euro,” Pesole said.

Markets were quieter due to the Juneteenth federal holiday in the US, with lower liquidity adding to the uncertainty.

Looking ahead, the Federal Reserve signalled that it still expects to cut interest rates by half a percentage point before the end of the year, though opinions among policymakers are divided.

Fed Chair Jerome Powell warned that inflationary pressures could mount over the summer as Trump’s tariffs begin to affect consumers more directly.

“Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer,” Powell said during Wednesday’s press conference. “We know that because that’s what businesses say. That’s what the data say from the past.”

Powell’s remarks underscore the balancing act facing global policymakers as they grapple with geopolitical instability, persistent inflation, and the uncertain trajectory of interest rates.