The dollar appreciated against the majority of its counterparts as a resurgence of conflict in the Middle East heightened inflation concerns and increased the likelihood of interest rate increases by central banks worldwide.
Against Japan’s currency, the dollar appreciated by 0.2% to reach 162.075 yen. The euro depreciated by 0.1%, settling at $1.1397, whereas the British pound experienced a decline of 0.2%, reaching $1.3374. The Australian dollar experienced a decline of 0.3%, settling at $0.6928, while the New Zealand dollar saw a slight decrease of 0.1%, reaching $0.5757. U.S. and Iranian forces engaged in significant missile and drone exchanges over the weekend, with Tehran directing its attacks at U.S. installations in various Gulf states on Sunday.
Additionally, Iran announced the renewed closure of the critical Strait of Hormuz shipping route. Oil prices experienced an increase during Asian trading hours, with Brent crude futures rising by 4.1% to reach $79.11 per barrel. “After the flare-up into the end of last week which continued over the weekend, the dollar has responded, and the crude oil price has been the driver,” said Tony Sycamore. “This reinflames concerns that if the energy prices rise from here, we could start to see rate hikes pulled forward.” Fed funds futures indicate a 50.9% implied probability of two or more rate hikes occurring by the U.S. central bank’s December meeting, an increase from the 47.6% probability observed on Friday, as reported by the CME Group’s FedWatch tool.
The U.S. dollar index, which measures the greenback’s strength against a basket of six currencies, was up 0.1% at 101.13 after earlier touching its highest level since July 8. “The dollar was obviously the big winner from the war last time. But it’s starting from a pretty different point this time, having strengthened quite a lot and there already having been a fairly lasting repricing of the Fed outlook,” stated Thomas Mathews. “It’s not clear to me the greenback would gain as much this time if the situation continued to worsen, which I think is probably reflected in trade so far.”
Inflation risks are expected to be a central topic of discussion with the upcoming release of U.S. CPI data on Tuesday, followed by PPI measures the next day, alongside Fed Chair Kevin Warsh’s testimony before Congress, as noted by analysts in a research report. The Bank of Japan is likely to adjust its economic growth projection for fiscal 2026, while maintaining a vigilant stance on the potential for inflation to exceed expectations. This outlook is influenced by increasing costs stemming from a depreciating yen and robust demand for AI, which are mitigating some of the decreases in oil prices, according to sources.