Dollar rises as Middle East tensions lift oil prices and revive rate-hike bets

The US dollar climbed to a two-week high on Wednesday as renewed hostilities in the Middle East pushed oil prices higher, raising concerns over inflation and strengthening expectations of tighter US monetary policy.

The dollar index, which tracks the greenback against a basket of major currencies, rose 0.11% to 99.79, its highest level since August 17. The euro fell 0.13% to $1.1577.

The dollar’s safe-haven appeal strengthened as US Treasury yields rose and investors increased bets on a Federal Reserve interest rate hike, despite recent US economic data falling short of forecasts.

The United States launched a series of airstrikes against Iran on Tuesday, prompting Iranian retaliation in the most serious escalation in weeks. Oil prices extended their gains on Wednesday, with Brent crude rising 1.15% to $95.74 a barrel and US West Texas Intermediate crude gaining 0.85% to $91.05.

“Continued vigilance is needed over the situation in the Middle East today,” said Kumiko Ishikawa, senior FX analyst at Sony Financial Group.

Rate-hike expectations strengthen

The New Zealand dollar fell 0.8% against the greenback to $0.5844, its weakest level since August 13, despite the Reserve Bank of New Zealand raising its official cash rate by 25 basis points to 2.75%.

Analysts said investors viewed the decision as less hawkish than expected.

US job openings and manufacturing data released overnight also came in below market expectations. However, money markets increased expectations of a Federal Reserve rate hike following Chair Kevin Warsh’s speech in Jackson Hole last week.

US proposes parents show citizenship status when applying for children’s passports

Markets now see a 68% probability of a September Fed rate hike, up from about 40% a week earlier, according to CME Group’s FedWatch tool.

“If the figures are weak, their impact could be offset by heightened tensions in the Middle East,” Ishikawa said.

Investors are awaiting August employment and inflation data before the Fed’s September 15-16 meeting. Economists polled by Reuters expect Friday’s employment report to show that US employers added 56,000 jobs last month.

Fed Governor Michael Barr said on Tuesday that the central bank may need to raise interest rates if inflation fails to cool quickly.

The benchmark US 10-year Treasury yield climbed to 4.81%, its highest level since November 2023. Japan’s 10-year government bond yield also rose to 3.01% after reaching the 3% mark on Tuesday for the first time in three decades.

Higher yields can attract investors toward safe-haven currencies such as the dollar while reducing the appeal of riskier assets.

The British pound slipped 0.09% to $1.3503, while the Australian dollar eased 0.04% to $0.7141.

In cryptocurrencies, Bitcoin fell 0.24% to $77,242.62, while Ether declined 0.51% to $2,407.74.

Yen remains under pressure

The Japanese yen weakened 0.08% against the dollar to 160.28, its lowest level since July 31. The currency remained below the psychologically important 160-per-dollar threshold despite strong expectations that the Bank of Japan will raise interest rates this month.

US Treasury Secretary Scott Bessent expressed strong support for “decisive” monetary measures to address yen weakness during a meeting with BOJ Governor Kazuo Ueda.

Ueda said he expected to discuss with the central bank’s board whether the economy was developing in line with its forecasts and whether inflation risks were increasing.

BOJ board member Hajime Takata also said the central bank should respond flexibly to inflationary pressures through interest-rate increases.

A rare joint US-Japan intervention at the end of July briefly supported the yen and pulled it away from its 40-year low of 163.99. The currency has since given back around half of those gains.

Tony Sycamore, a market analyst at IG, said another coordinated intervention appeared unlikely until tensions around the Strait of Hormuz eased and pressure on oil prices diminished.