Dollar Rises 0.6 Percent as Middle East Conflict Lifts Oil Prices

The US dollar index rose by 0.6 percent on Monday. The currency touched 99.648, its highest level since September 2. Investors moved into the dollar as a safe haven. This shift followed escalating conflict in the Middle East. The region's instability pushed global oil prices higher. Brent crude increased by 3 percent to reach 108 dollars per barrel.

Market participants also prepared for a Federal Reserve decision. The central bank is expected to hike interest rates for the first time in over two years. Warnings from major AI companies about potential dangers also hurt risk sentiment. This combination supported the dollar against major peers. The euro fell to a one-month low of 1.153 dollars. The British pound dropped 0.5 percent to 1.3474 dollars.

Geopolitical risks drive energy prices

Houthi strikes on Saudi Arabia heightened supply concerns. The kingdom had shut down its main pipeline to bypass the Strait of Hormuz. Diplomatic efforts between the United States, Israel, and Iran appear stalled. A meeting between Tehran and Gulf governments was postponed. These events added to fears over energy security.

Francesco Pesole, a currency strategist at ING, noted that Gulf developments remain concerning. He stated that AI-related headlines also weigh on equities. This environment supports the dollar. Lee Hardman, a senior currency analyst at MUFG, said the dollar strengthened due to building expectations for tighter monetary policy. Global bond yields moved toward multi-year highs. This yield increase reflects the rising energy costs.

Fed rate hike expectations surge

Money markets indicate a 90 percent chance of a rate hike on Wednesday. This probability increased from around 60 percent a week earlier. Data from CME Group’s FedWatch tool supports this view. The jump in energy prices has pushed diesel to record highs. This trend helped lift underlying inflation in August by more than expected. The Fed faces pressure to tighten policy in response.

Scotiabank analysts led by Shaun Osborne warn of market risks. An unchanged decision from the Fed would shock markets. It would be a clear negative for the US dollar. A dovish hike that does not commit to additional moves would also weigh on the currency. The outcome of the Wednesday meeting will be a key driver for the dollar's next move.

Yen weakens against dollar

The Japanese yen was notably weak on Monday. It gave up some of its recent sharp gains. These gains were driven by rising bets on Bank of Japan rate hikes. The US dollar rose 0.9 percent against the yen. The exchange rate reached 154.88 yen. This is up from last week's low of below 153 yen. The yen's weakness contrasts with the dollar's strength.

Rising bets on rate hikes have pushed bond yields to highs in the US, Europe, and Japan. The impact on the FX market has been relatively limited so far. Yields have largely moved in tandem across these regions. According to GN auto markets/forex: currency markets, the dollar remains the primary beneficiary of this global tightening cycle. The interplay between energy prices and central bank policy will define the near-term trajectory for major currencies.