The US dollar remained close to an 18-month peak on Monday, supported by growing demand for safe-haven assets. Escalating tensions in the Middle East have increased market uncertainty, while investors await crucial US inflation data later this week.
Geopolitical risks continued to dominate financial markets as fresh attacks in the Gulf raised concerns about energy supplies and global economic stability.
Middle East Tensions Drive Oil Prices Higher
Oil markets experienced renewed volatility following intensified attacks by Yemen’s Iran-backed Houthi rebels against Saudi Arabia. Reports of two tanker attacks over the weekend added further pressure to an already uncertain energy market.
Brent crude futures climbed 2.09% to $106.80 per barrel, approaching their highest level in two weeks. The latest escalation overshadowed President Donald Trump’s Sunday announcement of an energy-related ceasefire agreement between Russia and Ukraine.
Despite recent fluctuations, Brent crude remains approximately 45% above its level before the outbreak of the US-Israeli war with Iran.
Meanwhile, the US dollar index, which measures the greenback against six major currencies, advanced 0.16% to 102.39. That left it just below the 18-month high recorded last week.
Investors Increase Bullish Bets on the US Dollar
Recent positioning data from US regulators indicate that traders have significantly increased their exposure to the dollar.
Bullish dollar positions reached approximately $36 billion in the week ending October 7, compared with just $8.4 billion three weeks earlier. Much of this shift came at the expense of the euro, highlighting growing investor preference for the US currency.
According to Joel Kruger, a market strategist at LMAX Group in London, financial markets initially showed signs of optimism. However, renewed geopolitical concerns and rising oil prices quickly weakened investor confidence.
Consequently, declining risk appetite has encouraged another wave of safe-haven demand for the US dollar.
US Inflation Data Could Determine the Dollar’s Next Move
Attention is now shifting toward Wednesday’s US Consumer Price Index (CPI) report. The inflation figures represent one of the final major economic indicators ahead of the Federal Reserve’s monetary policy meeting later this month.
A stronger-than-expected inflation reading could reinforce expectations that US interest rates will remain elevated. This would potentially provide further support for the dollar.
Recent economic indicators have already raised concerns about persistent inflation.
Data released last week showed that US consumer confidence weakened further in early October. Rising living costs, partly driven by the Middle East conflict and higher energy prices, have negatively affected household expectations.
The Federal Reserve increased interest rates last month for the first time since 2023 in an effort to contain inflation. Since then, investors have closely monitored economic developments for indications of additional policy tightening.
According to the CME FedWatch tool, markets currently assign an 81% probability that the Fed will leave interest rates unchanged this month. That compares with a 51% probability one month earlier.
Marc Chandler, chief market strategist at Bannockburn Global Forex, expects this week’s inflation reading to remain elevated.
Nevertheless, Chandler believes the threshold for another rate increase is relatively high, particularly given the unusual political circumstances surrounding a potential pre-election policy move.
Global Bond Selloff Raises Concerns Over Borrowing Costs
Beyond currency markets, investors are increasingly concerned about rising government borrowing costs.
Bond markets have experienced substantial selling pressure in recent weeks, pushing yields across several major economies toward multi-decade highs.
Persistent inflation, elevated energy prices and expanding government debt have contributed to these developments.
Higher bond yields could also complicate monetary policy decisions, particularly as central banks balance inflation risks against slowing economic activity.
Euro Extends Losses as France’s Fiscal Risks Intensify
The euro continued to struggle against the strengthening dollar, falling 0.19% to $1.1180.
The European currency recently completed its fifth consecutive weekly decline, reflecting persistent concerns about France’s deteriorating fiscal position ahead of the country’s 2027 presidential election.
Investors remain particularly focused on the widening yield difference between French and German government bonds.
The spread between their respective 10-year borrowing costs stood near 140 basis points. Last week, it approached 160 basis points, its widest level since 2012.
A widening spread generally indicates that investors are demanding greater compensation for holding French government debt compared with German bonds, which are considered relatively safer.
Currency strategists at OCBC noted that uncertainty remains over whether rising financing costs will encourage the French government to adopt stronger fiscal discipline.
These concerns could continue weighing on the euro, especially if demand for the US dollar remains elevated.
Japanese Yen and British Pound Show Limited Movement
Elsewhere in foreign exchange markets, the dollar edged higher against the Japanese yen, trading around 158.57 yen.
Market activity was relatively subdued because of a public holiday in Japan, which reduced trading volumes.
Meanwhile, the British pound remained broadly stable near $1.323 against the dollar.
Looking ahead, the direction of major currency pairs will likely depend on developments in the Middle East and the upcoming US inflation report.
With energy prices elevated and investors reassessing Federal Reserve policy expectations, the US dollar could remain a preferred safe-haven asset as uncertainty persists across global financial markets.
