Dollar Rises as Middle East Conflict Fuels Inflation and Rate Hike Fears

The U.S. dollar strengthened against most major currencies on Monday as renewed conflict in the Middle East heightened inflation concerns and increased expectations that central banks, including the Federal Reserve, could raise interest rates sooner than anticipated.

The greenback gained 0.1% against the Japanese yen to trade at 161.92, while the euro slipped 0.1% to $1.1403. The British pound also fell 0.1% to $1.3383. Commodity-linked currencies weakened, with the Australian dollar easing 0.1% to $0.6942 and the New Zealand dollar declining 0.1% to $0.5757.

Investor demand for the U.S. dollar increased after the United States and Iran exchanged missile and drone attacks over the weekend. Tehran also claimed it had once again closed the Strait of Hormuz, a key global shipping route for crude oil exports, raising concerns about energy supplies and inflation.

Oil prices surged in response, with Brent crude climbing 3.3% to $78.49 per barrel. Analysts said the jump in energy prices could delay any easing in monetary policy if inflationary pressures continue to build.

Tony Sycamore, a market analyst at IG, said the latest geopolitical escalation has boosted the U.S. dollar while rising crude prices have renewed concerns that higher energy costs could force central banks to bring forward interest rate hikes.

Market expectations have shifted accordingly. CME Group’s FedWatch Tool shows traders now assign a 52.1% probability that the Federal Reserve will deliver two or more rate hikes by its December meeting, up from 47.6% at the end of last week.

The U.S. Dollar Index, which tracks the currency against a basket of six major peers, held at 101.07 after touching its highest level since July 8.

Markets are also preparing for a busy week of economic data, including the U.S. Consumer Price Index (CPI) on Tuesday, Producer Price Index (PPI) figures on Wednesday, and testimony from Federal Reserve Chair Kevin Warsh before Congress. These events are expected to provide further clues on the outlook for inflation and interest rates.

Meanwhile, Reuters reported that the Bank of Japan may raise its fiscal 2026 growth forecast while maintaining its focus on inflation risks. In cryptocurrency markets, Bitcoin fell 0.6% to $63,770.42, while Ether declined 1.1% to $1,801.28.