Dollar Gains on Fresh US-Iran Strikes

The dollar index climbed above 101 on Monday, rising for the second straight session as escalating tensions in the Middle East fueled safe-haven demand for the currency. The US and Iran exchanged fresh missile strikes over the weekend amid ongoing disputes over shipping through the Strait of Hormuz, pushing oil prices higher and reinforcing expectations of interest-rate hikes to contain inflation. Investors are also awaiting key US inflation data this week for further clues on the Federal Reserve's policy outlook. Markets currently expect the Fed to deliver one rate increase before the end of the year. Minutes from the Fed’s June meeting, released last week, showed that a few policymakers saw a case for raising rates, though they ultimately supported keeping policy unchanged. Meanwhile, Fed Chair Kevin Warsh is scheduled to make his first appearance before the US Congress on Tuesday and Wednesday.

The dollar index was little changed at around 100.9 on Friday and was also on track to end the week largely unchanged, as traders continued to assess the fragile and uncertain situation in the Middle East. Oil prices eased after surging earlier in the week, following reports that the US and Iran would continue peace negotiations. However, renewed exchanges of strikes between the two countries raised concerns that the conflict could escalate further, with the status of the previous truce remaining uncertain. The renewed hostilities also revived fears of another wave of inflationary pressure, reinforcing expectations that the Fed may need to tighten monetary policy. Markets currently assign a 62% probability of a Fed rate hike in September, up from 58% a week ago but down from around 70% earlier this week. Meanwhile, New York Fed President John Williams said that, among the factors driving inflation in the US, he is most concerned about demand fueled by AI.

The dollar index fell toward 100.5 on Friday, extending losses for a third straight session as reports that the US and Iran will continue peace negotiations despite a recent escalation in hostilities dampened safe-haven demand for the currency. Lower oil prices also helped ease inflation concerns and reduce expectations of aggressive policy tightening, although markets still largely anticipate at least one Federal Reserve interest rate hike this year. Meanwhile, New York Fed President John Williams said that, among the factors driving inflation in the US, he is most focused on demand fueled by artificial intelligence. Separately, Fed Chair Kevin Warsh unveiled the leadership of five task forces to review the US central bank’s approach to key areas of policymaking, signaling the potential for changes in how the Fed conducts monetary policy. The dollar weakened broadly on Friday, posting its largest declines against the Japanese yen and the New Zealand dollar.