US Dollar Climbs to Weekly High as Middle East Tensions Lift Treasury Yields and Safe-Haven Demand

The U.S. dollar strengthened to its highest level in more than a week on Tuesday as rising Treasury yields and escalating conflict in the Middle East fueled demand for safe-haven assets. The Japanese yen, meanwhile, weakened to its lowest level against the greenback since 1986, highlighting continued pressure on Japan's currency.

The U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, rose 0.2% to 101.17, its strongest reading since July 13.

The dollar had retreated last week after softer U.S. inflation data, including slower consumer and producer price growth, eased expectations for immediate Federal Reserve tightening. Lower gasoline prices also helped cool inflation, while consumer sentiment improved and inflation expectations declined.

However, renewed geopolitical tensions have shifted market sentiment. Oil prices have surged after the breakdown of the U.S.-Iran peace agreement, reviving concerns that higher energy costs could reignite inflation. Brent and WTI crude have climbed nearly 4% since Monday after posting double-digit gains last week.

Federal Reserve officials have also reinforced a cautious stance. Fed Chair Kevin Warsh told Congress that inflation risks remain elevated, while Dallas Fed President Lorie Logan reiterated support for "modestly higher" interest rates if price pressures persist.

The conflict between the United States and Iran continued to intensify, with both countries exchanging attacks for a tenth consecutive day. President Donald Trump said Washington has no interest in negotiations until Iran demonstrates a meaningful willingness to engage, while reiterating that the U.S. would act decisively against any nuclear-related facilities.

Elsewhere, the British pound fell 0.4% to $1.3379 as UK government bond yields climbed amid concerns over Prime Minister Andy Burnham's commitment to fiscal discipline. Analysts said any departure from existing borrowing rules or tax commitments could further weaken sterling.

The Japanese yen slid to 163.19 per dollar, its weakest level in four decades, keeping traders alert for possible intervention by Japanese authorities. Meanwhile, the euro slipped 0.1% to $1.1401 ahead of Thursday's European Central Bank policy meeting. Although the ECB is expected to leave interest rates unchanged, persistent energy-driven inflation is likely to keep policymakers cautious about signaling any future easing.