BY COMFOORT OGBONNA
The U.S. dollar strengthened against most major global currencies on Monday as renewed military conflict in the Middle East heightened concerns about rising inflation and increased expectations that central banks could keep interest rates higher for longer.
Investors moved toward the U.S. currency after escalating violence between the United States and Iran raised fears of supply disruptions in global energy markets. The renewed geopolitical tensions also pushed oil prices higher, reinforcing concerns that rising energy costs could complicate the fight against inflation.
The dollar gained 0.1% against the Japanese yen, trading at 161.92 yen. The euro slipped 0.1% to $1.1403, while the British pound also weakened 0.1% to $1.3383. Commodity-linked currencies came under pressure as well, with the Australian dollar falling 0.1% to $0.6942 and the New Zealand dollar declining 0.1% to $0.5757.
Market sentiment shifted after intense military exchanges between U.S. and Iranian forces over the weekend. Iran launched missile and drone attacks targeting U.S. military facilities across several Gulf states and announced that it had once again closed the strategically important Strait of Hormuz, one of the world’s busiest shipping routes for crude oil and liquefied natural gas.
The possibility of prolonged disruptions to energy supplies immediately lifted crude oil prices. Brent crude futures climbed 3.3% in early Asian trading to $78.49 per barrel as traders assessed the potential impact of the conflict on global oil exports.
According to Tony Sycamore, a market analyst at IG in Sydney, the sharp rise in oil prices has become the primary factor supporting the U.S. dollar.
He noted that higher energy costs could reignite inflationary pressures around the world, increasing the likelihood that central banks may need to maintain tighter monetary policies or even raise interest rates sooner than previously expected.
Financial markets are now leaning toward the possibility that the U.S. Federal Reserve could deliver two additional interest rate increases before the end of the year. Expectations for further policy tightening have grown as investors weigh the inflation risks associated with higher oil prices and continued geopolitical uncertainty.
According to futures market pricing, traders now see a slightly greater than 52% probability that the Federal Reserve will implement at least two more rate hikes by its December policy meeting. That represents an increase from expectations at the end of last week, reflecting the rapid shift in market sentiment following the latest developments in the Middle East.
The U.S. Dollar Index, which measures the value of the American currency against a basket of six major global currencies, held near 101.07 after reaching its highest level since early July during Monday’s trading session.
Investors are also preparing for a busy week of economic data that could significantly influence expectations for future interest rate decisions.
The spotlight will be on the release of the U.S. Consumer Price Index (CPI), a key measure of inflation, followed by the Producer Price Index (PPI), which tracks wholesale price changes. Together, the reports are expected to provide fresh insight into whether inflationary pressures are easing or becoming more persistent.
Market participants will also closely watch testimony from Federal Reserve Chair Kevin Warsh before both the House and Senate, where lawmakers are expected to question him about the central bank’s outlook for inflation, economic growth, and monetary policy.
Meanwhile, attention is also turning to Japan, where policymakers are reportedly becoming more concerned about inflation risks. According to people familiar with the matter, the Bank of Japan is considering raising its economic growth forecast for fiscal 2026 while maintaining a close watch on inflation that could exceed its target.
Although lower oil prices earlier this year helped reduce some cost pressures, analysts believe the continued weakness of the Japanese yen and growing demand for artificial intelligence technologies have contributed to higher import and production costs, keeping inflation risks elevated.
The currency market’s movements underscore how geopolitical developments can rapidly influence investor behavior. During periods of heightened uncertainty, the U.S. dollar is often viewed as a safe-haven asset, attracting investors seeking stability even as rising inflation expectations create uncertainty for financial markets.
Cryptocurrency markets also experienced modest declines as investors adopted a more cautious approach. Bitcoin fell 0.6% to $63,770.42, while Ether declined 1.1% to $1,801.28, reflecting reduced appetite for riskier assets amid growing geopolitical tensions.
With military conflict in the Middle East threatening global energy supplies and a series of critical U.S. economic reports scheduled for release this week, investors are expected to remain highly focused on inflation trends and central bank policy decisions. The combination of geopolitical uncertainty, volatile oil prices, and expectations for higher interest rates is likely to keep currency and financial markets on edge in the days ahead.
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