The U.S. dollar strengthened against most major currencies as renewed fighting in the Middle East increased inflation concerns.
Investors also raised expectations that central banks may need to keep interest rates higher or even consider further rate increases if energy prices continue to climb.
Dollar Gains Against the Yen and Euro
The dollar rose 0.2% against the Japanese yen to trade near 162.08.
Meanwhile, the euro slipped 0.1% to around $1.1397. The British pound also weakened, falling 0.2% to approximately $1.3374.
The Australian dollar declined 0.3% to $0.6928, while the New Zealand dollar eased 0.1% to $0.5757.
Middle East Attacks Increase Market Uncertainty
U.S. and Iranian forces exchanged heavy missile and drone attacks over the weekend.
Iran targeted U.S. facilities across several Gulf states on Sunday. Tehran also said it had once again closed the Strait of Hormuz.
The waterway is one of the world’s most important shipping routes for oil and liquefied natural gas.
Any prolonged disruption could reduce global energy supplies and push prices higher.
Oil Prices Surge in Asian Trading
Crude oil prices rose sharply following the latest attacks.
Brent crude futures climbed 4.1% to $79.11 per barrel during Asian trading.
Tony Sycamore, a market analyst at IG in Sydney, said the stronger dollar was largely driven by the rise in oil prices.
He added that a continued increase in energy costs could bring forward expectations for further interest-rate increases.
Fed Rate-Hike Expectations Rise
Investors increased their bets that the Federal Reserve could raise interest rates again before the end of the year.
Fed funds futures indicated a 50.9% probability of at least two additional rate increases by the Federal Reserve’s December meeting.
That was higher than the 47.6% probability recorded on Friday, according to CME Group’s FedWatch tool.
U.S. Dollar Index Reaches Recent High
The U.S. Dollar Index rose 0.1% to 101.13.
Earlier in the session, the index reached its highest level since July 8.
The index measures the dollar’s performance against a basket of six major global currencies.
Safe-haven demand and changing interest-rate expectations both supported the greenback.
Analysts Question the Dollar’s Upside
Thomas Mathews, head of Asia-Pacific markets at Capital Economics, said the dollar was one of the main beneficiaries during the previous escalation in the conflict.
However, he noted that conditions are now different because the currency has already strengthened significantly.
Markets have also already adjusted their expectations for Federal Reserve policy.
As a result, Mathews said the dollar may not rise as sharply this time, even if the geopolitical situation continues to worsen.
U.S. Inflation Data Comes Into Focus
Inflation risks are likely to remain a major focus this week.
The United States will release Consumer Price Index data on Tuesday, followed by Producer Price Index figures the next day.
Markets will also monitor Federal Reserve Chair Kevin Warsh’s testimony before the House and Senate.
These events could provide further clues about inflation, interest rates and the outlook for the U.S. dollar.
Bank of Japan May Raise Growth Forecast
The Bank of Japan may increase its fiscal 2026 economic growth forecast, according to people familiar with the central bank’s discussions.
Officials are also expected to continue highlighting the risk that inflation could exceed expectations.
Higher import costs caused by a weaker yen and strong investment linked to artificial intelligence may offset some of the benefits from lower oil prices.
Bitcoin and Ether Move Lower
Cryptocurrencies also came under pressure as investors reduced exposure to riskier assets.
Bitcoin fell 2.1% to approximately $62,790.
Ether declined 2.3% to around $1,779.
The losses reflected broader caution across global financial markets following the renewed Middle East tensions.
