The US dollar remained close to an 18-month high on Monday, as escalating tensions in the Middle East kept investors cautious. Meanwhile, markets turned their attention to upcoming US inflation data, which could influence the Federal Reserve’s next interest rate decision.
Geopolitical uncertainty, volatile oil prices and concerns over global borrowing costs continued to shape currency markets. As a result, investors remained alert to developments that could trigger further market volatility.
Middle East Tensions Drive Oil Market Volatility
Oil prices fluctuated as the Middle East conflict intensified. Yemen’s Iran-backed Houthi rebels increased their attacks on Saudi Arabia, while two oil tankers reportedly came under attack over the weekend.
Additionally, US President Donald Trump’s announcement on Sunday of an energy-related ceasefire between Russia and Ukraine influenced market sentiment.
Despite ongoing geopolitical risks, Brent crude futures declined 1.4% to $103.30 per barrel during Asian trading hours.
Analysts at Commonwealth Bank of Australia expect Houthi attacks on Saudi energy infrastructure to continue. They believe these disruptions could support both oil prices and the US dollar.
Although Iran confirmed receiving an American peace proposal through intermediaries, the analysts considered a diplomatic breakthrough this week unlikely.
US Dollar Index Holds Near 18-Month Peak
The US Dollar Index (DXY) edged lower to 102.16 but remained close to the 18-month high reached last week.
Currency trading was relatively subdued, partly because Japanese financial markets were closed for a public holiday. Consequently, reduced liquidity contributed to narrow trading ranges across Asia.
The dollar slipped 0.06% against the Japanese yen to 158.245 yen. Meanwhile, the Australian dollar remained largely unchanged at $0.69815, alongside the New Zealand dollar at $0.56080.
Despite these modest movements, the greenback continued to benefit from geopolitical uncertainty and expectations surrounding US monetary policy.
US Inflation Data Could Determine the Fed’s Next Move
Investors are now preparing for Wednesday’s US Consumer Price Index (CPI) report, a crucial inflation indicator ahead of the Federal Reserve’s late-October policy meeting.
Recent economic figures revealed that US consumer sentiment weakened further in early October. Rising living costs, partly driven by the Middle East conflict, have increased pressure on American households.
The Federal Reserve raised interest rates last month for the first time since 2023 to tackle persistent inflation. However, investors remain uncertain about the timing of additional monetary tightening.
According to the CME FedWatch tool, markets currently assign an 81% probability that the Fed will leave interest rates unchanged in October. This compares with just 51% one month earlier.
Chris Weston, head of research at Pepperstone, believes another October rate increase would require exceptionally strong inflation figures.
Nevertheless, a higher-than-expected CPI reading could shift expectations toward further rate hikes in December and January, rather than the March increase currently anticipated by markets.
Global Bond Selloff Adds Pressure to Financial Markets
Beyond inflation and geopolitical tensions, investors remain concerned about rising government borrowing costs.
Recent bond market selloffs have pushed yields across several major economies toward multi-decade highs. Persistent inflation, elevated energy prices and expanding government debt have contributed to the pressure.
These developments have increased uncertainty in global financial markets, particularly in countries facing significant fiscal challenges.
Euro Faces Pressure From France’s Fiscal Uncertainty
The euro gained approximately 0.1% against the US dollar, trading near $1.121. However, the European currency recently completed its fifth consecutive week of losses.
Concerns about France’s public finances and political uncertainty ahead of the 2027 presidential election have weighed heavily on investor confidence.
The yield spread between French and German 10-year government bonds widened to 137 basis points, approaching its highest level since 2012.
Foreign exchange strategists at OCBC noted that it remains uncertain whether rising borrowing costs will encourage greater fiscal discipline in France.
They also expect EUR/USD to trade within a relatively narrow range as political and fiscal headlines gradually lose momentum. Furthermore, Europe’s structural economic challenges could limit any meaningful euro recovery.
Asian Currencies Strengthen as Pound Edges Higher
Several Asian currencies recorded gains against the US dollar despite the greenback’s broader resilience.
The Indian rupee appreciated approximately 1% to 95.8 per dollar after the country’s central bank introduced measures to reduce pressure on the currency.
Specifically, authorities redirected oil companies’ dollar purchases away from the spot foreign exchange market, helping ease demand for the greenback.
Meanwhile, the South Korean won strengthened 0.5% to 1,334 per dollar, reaching its highest level in two years.
The British pound also advanced modestly, gaining 0.1% to trade at $1.3245. In contrast, both the onshore and offshore Chinese yuan remained relatively stable.
US Dollar Outlook: Inflation and Geopolitics Remain Key
The US dollar’s next major move will likely depend on inflation figures, Federal Reserve expectations and developments in the Middle East.
Stronger-than-expected US inflation could reinforce expectations of tighter monetary policy and support the dollar. Conversely, softer inflation data could ease rate hike concerns and create opportunities for competing currencies.
For now, the US dollar remains near its 18-month peak, with traders closely monitoring geopolitical risks, oil prices and Wednesday’s CPI release for clearer market direction.
