The dollar tested its 2025 low on Thursday, while stocks eased from record highs, as a mixture of rising Middle East tensions and concern over the fragility of a trade truce between Washington and Beijing pushed investors into safe-haven assets.
Separately, a report on U.S. consumer inflation on Wednesday showed overall price pressures remained contained in May, largely due to declines in the cost of gasoline, cars and housing. But most economists expect inflation to pick up as the impact of U.S. tariffs begins to bite.
The dollar, which has lost around 10% in value against a basket of currencies this year, skimmed its lowest levels since late April, which in turn marked its lowest level in three years.
Global stocks took a breather from the almost-unbroken rally that has run since early April, leaving the MSCI All-Country World index down 0.1%, just below Wednesday's all-time high.
In Europe, the STOXX 600 fell 0.8%, led mostly by airlines and autos, given the strength in the oil price, while futures on the S&P 500 and Nasdaq fell 0.5%.
The U.S. administration on Wednesday said U.S. personnel were being moved out of the Middle East due to heightened security risks in the region, which briefly drove oil prices up by 4% before they receded.
"(A flare-up in tensions) is a significant tail risk, but I don't think it is anybody's baseline forecast. So it's something to watch if there is a real escalation there, then markets will take fright and that would have ramifications for the oil price," Daiwa Capital economist Chris Scicluna said.
Iran, for its part, said it will not abandon its right to uranium enrichment, a senior Iranian official told Reuters on Thursday, adding that a "friendly" regional country had alerted Tehran over a potential military strike by Israel.
Classic safe-haven assets got a lift. The Swiss franc and the Japanese yen strengthened, pushing the dollar down by around 0.6% against both currencies, while gold held firm at $3,350 an ounce.
The sense of relief stemming from a positive conclusion to U.S.-China trade talks earlier this week, which President Donald Trump said was a "great deal with China," evaporated by Thursday.
Adding yet another dose of uncertainty in the markets, Trump said the U.S. would send out letters in one to two weeks outlining the terms of trade deals to dozens of other countries, which they could embrace or reject.
"Markets may have no choice but to respond to Trump's tariff threat – even if it's just posturing to bring others to the table. The gap between 'risk-on' positioning and real-world risks has stretched too far," said Charu Chanana, chief investment strategist at Saxo Bank.
Trump's erratic tariff policies have roiled global markets this year, prompting hordes of investors to exit U.S. assets, especially the dollar, as they worried about rising prices and slowing economic growth.
The euro, one of the beneficiaries of the dollar's decline, touched a seven-week high and was last at $1.1535.
U.S. Treasuries also rallied in price, pushing yields down 1.5 basis points to below 4.4%, while two-year yields, which are more sensitive to inflation and interest-rate expectations, eased 1.6 bps to 3.93%.
Later in the day, the focus will be on a producer inflation report as some of the components feed into the Federal Reserve's (Fed) preferred inflation gauge – the Personal Consumption Expenditure Index.
Wednesday's consumer index kept alive the prospect of the Fed cutting rates by a quarter point, but only in September, as policymakers assess how tariffs work their way through the real economy.
"I suspect it's probably going to be a combination of the two. Therefore, it makes sense for the Fed to wait and see what happens rather than rushing into a rate cut," AMP Capital's head of investment strategy and chief economist, Shane Oliver, said.
Oil, which has fallen by 20% in the last year, eased by 1% to $69.07 a barrel, but remained near two-month highs, adding another moving part to the outlook for interest rates.
