The U.S. dollar gained ground against most major world currencies Monday as renewed conflict in the Middle East raised fresh concerns about inflation and pushed traders to anticipate additional interest rate hikes from central banks.
Against the Japanese yen, the dollar edged up 0.1% to 161.92 yen. The euro dipped 0.1% to $1.1403, while the British pound fell 0.1% to $1.3383. The Australian dollar slipped 0.1% to $0.6942, and the New Zealand dollar dropped 0.1% to $0.5757.
The latest market turbulence followed a weekend of heavy military exchanges between U.S. and Iranian forces. Tehran struck U.S. facilities in Gulf states on Sunday and announced it had once again shut down the strategically critical Strait of Hormuz.
When Asian markets opened for the week, oil prices surged — Brent crude futures climbed 3.3% to $78.49 per barrel.
Tony Sycamore, a market analyst at IG in Sydney, explained the connection between the conflict and currency markets. “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,” he said. “This reinflames concerns that if the energy prices rise from here, we could start to see rate hikes pulled forward.”
Markets are now leaning toward the possibility of two rate increases from the Federal Reserve before the end of the year. According to the CME Group’s FedWatch tool, Fed funds futures are now pricing in a 52.1% chance of two or more rate hikes by the Fed’s December meeting — up from a 47.6% probability as of Friday.
The U.S. dollar index, which tracks the greenback’s performance against a basket of six major currencies, held at 101.07 after climbing as much as 0.2% from Friday’s closing level — reaching its strongest point since July 8.
Analysts at Westpac noted that inflation risks are expected to remain a central focus in the days ahead, with U.S. consumer price index data due Tuesday, producer price figures the following day, and Fed Chair Kevin Warsh scheduled to testify before both chambers of Congress.
Meanwhile, three sources familiar with the Bank of Japan’s internal thinking told Reuters that the central bank may raise its economic growth forecast for fiscal 2026, keeping its attention on the risk that inflation could overshoot expectations. Rising costs tied to a weak yen and strong demand for artificial intelligence are helping to offset some of the decline in oil prices.
In the cryptocurrency markets, bitcoin fell 0.6% to $63,770.42, while ether dropped 1.1% to $1,801.28.
