LONDON/SINGAPORE, March 11 (Reuters) - The dollar gained slightly on Wednesday as ongoing fears of the war in the Middle East escalating kept risk appetite in check.
While any indication of a swift resolution to the U.S.-Israel war on Iran has tempered dollar gains, conflicting signals have left traders without clear direction.
U.S. President Donald Trump hinted on Monday that the war could end sooner than he had initially suggested, prompting a rebound in risk assets.
Iran, however, has continued to disrupt oil shipments through the Strait of Hormuz, drawing Washington's ire.
"The market doesn't believe the conflict is anywhere near being resolved. Investors are desperate to see some good news, but it seems unlikely that they are going to get it," said Chris Beauchamp, chief market analyst at IG.
The euro was flat at $1.1607, after climbing as much as 0.3% against the dollar. The yen was at 158.26 per dollar, weakening 0.1%.
The dollar index , which measures the U.S. unit against six other rivals, was slightly higher at 98.95.
"The impact on global growth and inflation will hinge on the scale and duration of higher energy prices, which remains highly uncertain," Capital Economics analysts wrote.
"An extreme scenario in which the conflict persists for several months and energy infrastructure is damaged could push the global economy into stagflation, prompting rate hikes in most economies."
Oil prices recovered on Wednesday after dropping earlier in the session, as doubts emerged over whether the International Energy Agency's reported plan for a reserve release would be enough to offset a supply shock.
COMING TO TERMS WITH UNCERTAINTY
"Financial markets can absorb significant shocks when the strategic path forward is reasonably clear. What markets struggle with is ambiguity," wrote Khalid Azim, a director at the Atlantic Council.
As the conflict stretched into its 12th day, the U.S. and Israel traded air strikes with Iran's military across the Middle East. Iran's government warned its state security forces were ready with "fingers on the trigger" to confront any revival of anti-government protests.
Traders are grappling with how to best price the risk.
"We expect the war to run for months, not weeks, while acknowledging the high level of uncertainty," said Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia.
Fed funds futures traders are now pricing in 39.7 basis points of U.S. interest rate cuts by year-end, indicating doubts over whether the central bank will make a second 25-basis-point cut this year.
Markets have been pricing in rate hikes from the European Central Bank over the past week, although policymakers said the central bank should take its time to reassess policy and stay on its present course for now.
Just two weeks ago, investors expected the ECB to keep rates steady all year, with a small chance of a rate cut. The central bank has kept rates unchanged since June 2025.
A key focus for the market is also U.S. inflation data for February later on Wednesday. This is expected to show core consumer prices rose 0.2% during the month while headline prices were up 0.3%, according to economists polled by Reuters.
Reporting by Niket Nishant in London and Ankur Banerjee in Singapore; Editing by Jamie Freed, Edwina Gibbs and Alexander Smith
