The U.S. dollar strengthened against most major currencies on Thursday as rising oil prices renewed concerns about global inflation.
The greenback reached a fresh 40-year high against the Japanese yen. It also advanced against the euro after the European Central Bank decided to keep interest rates unchanged.
Meanwhile, Brent crude climbed above $100 per barrel for the first time since late May. The latest oil rally increased demand for the dollar as investors assessed the economic impact of escalating tensions in the Middle East.
Brent Oil Rises Above $100
Brent crude extended its gains for a fifth consecutive trading session and moved above the psychologically important $100 level.
Oil prices rose after Yemen’s Iran-backed Houthi movement claimed responsibility for attacks on two Saudi oil tankers. The incidents increased concerns about possible disruptions to global energy supplies.
Shipping activity around the Strait of Hormuz has already declined sharply because of the continuing conflict between the United States and Iran.
As a result, investors are becoming increasingly concerned that higher energy costs could trigger another wave of inflation.
Dollar Index Reaches Highest Level Since June
The U.S. dollar index gained 0.3% to reach 101.46. This marked its highest level since June 25.
The index measures the dollar against six major global currencies, including the euro, Japanese yen and British pound.
The dollar has benefited from expectations that renewed inflationary pressure could encourage the Federal Reserve to raise interest rates again.
In addition, investors believe the U.S. economy may be better equipped than Europe or Japan to absorb higher energy costs.
ECB Leaves Interest Rates Unchanged
The European Central Bank kept its three main interest rates unchanged following its latest monetary policy meeting.
The deposit facility rate remained at 2.25%. Meanwhile, the main refinancing rate stayed at 2.40%, and the marginal lending facility rate was maintained at 2.65%.
The decision was widely expected. Oil prices had previously fallen following the ECB’s June rate increase, reducing some immediate inflation pressure.
However, renewed tensions between the United States and Iran have pushed energy prices higher again. This development has complicated the inflation outlook for the eurozone.
ECB Warns About Energy-Driven Inflation
The ECB said energy prices remain highly volatile and continue to trade well above the levels recorded before the latest Middle East conflict.
Policymakers warned that the full inflationary effect of the energy shock may not yet be visible in economic data.
The central bank said future decisions would depend on incoming information and would be made separately at each policy meeting.
Therefore, the ECB did not commit to either raising or lowering rates in the coming months.
Lagarde Says Rate Decision Was Unanimous
ECB President Christine Lagarde said policymakers unanimously agreed to leave interest rates unchanged.
However, she acknowledged that some officials had considered whether another rate increase should be discussed.
After reviewing the latest economic data, policymakers concluded that current rates were appropriate. They agreed to wait for more information about inflation, energy prices and economic growth.
The ECB is expected to monitor developments closely before its next meeting.
Economists Still Expect Another ECB Rate Hike
Some economists believe the ECB’s decision represents only a temporary pause.
Deutsche Bank chief European economist Mark Wall said the central bank may update its economic forecasts before raising rates again in September.
The main question is whether one additional increase will be enough to control inflation risks.
That decision will likely depend on both inflation trends and the strength of the eurozone economy.
Euro Falls Following ECB Decision
The euro weakened after the ECB announcement and Lagarde’s press conference.
The EUR/USD exchange rate declined by approximately 0.3% to $1.1374 as traders reacted to the central bank’s cautious approach.
The difference between the expected policies of the Federal Reserve and the ECB also supported the dollar.
While markets are considering the possibility of another U.S. rate hike, the ECB chose to wait for additional economic evidence.
Treasury Yields Rise on Inflation Concerns
Higher oil prices also pushed U.S. Treasury yields upward.
The benchmark 10-year Treasury yield increased by 4.7 basis points to approximately 4.704%. Bond yields generally rise when investors sell government debt.
The movement reflected expectations that persistent energy inflation could keep interest rates elevated for longer.
Higher U.S. bond yields can strengthen the dollar by making dollar-denominated assets more attractive to international investors.
Houthi Attacks Threaten Saudi Oil Supplies
The Houthis said they had attacked two Saudi tankers in the Red Sea. These were reportedly the first attacks since the group announced a blockade targeting Saudi vessels.
The incidents raised concerns about Saudi Arabia’s refining operations on its western coast.
Energy analytics company Kpler estimated that approximately 1.9 million barrels per day of Saudi refining capacity could be exposed to potential missile attacks.
Any serious disruption could tighten global supplies and place additional upward pressure on oil prices.
Strait of Hormuz Traffic Drops Sharply
Confirmed vessel crossings through the Strait of Hormuz have reportedly fallen by around 75%.
The waterway is one of the world’s most important routes for global oil shipments. However, shipping companies have become more cautious because of continued military exchanges between the United States and Iran.
The decline in traffic has caused more oil to accumulate inside the Gulf.
Further disruptions could make it more difficult for producers to export crude oil to international markets.
U.S.-Iran Conflict Continues to Escalate
The United States completed a twelfth consecutive night of military strikes against Iran on Wednesday.
A U.S. naval blockade also redirected several commercial vessels and disabled another ship to prevent access to Iranian ports.
Iran responded by attacking U.S. military facilities in nearby countries, including Kuwait, Jordan and Bahrain.
The continuing escalation has increased fears that the conflict could spread across the wider Middle East.
Trump Threatens Further Military Action
U.S. President Donald Trump criticized the Houthis following the attacks on the Saudi tankers.
He warned that the group and Iran could face major military retaliation if attacks on regional shipping continued.
His comments added to concerns that the United States could expand its military operations.
Any further escalation may increase volatility in oil, currency and global bond markets.
Bank Indonesia Unexpectedly Holds Rates
Outside Europe, Bank Indonesia also announced its latest monetary policy decision.
The central bank unexpectedly kept its seven-day reverse repo rate unchanged at 5.75%.
Instead of raising rates, policymakers introduced targeted foreign-exchange hedging measures designed to support the Indonesian rupiah.
The rupiah initially remained stable near 17,921.5 against the dollar. However, it later weakened to around 18,013 as the U.S. currency gained strength.
Oil Prices and Central Banks Drive Currency Markets
The latest market movements show how energy prices and monetary policy remain closely connected.
Brent oil above $100 has revived inflation concerns and increased expectations that central banks may need to maintain restrictive policies.
For now, the stronger U.S. economic outlook and higher Treasury yields are supporting the dollar.
At the same time, the ECB’s decision to pause rate increases has placed additional pressure on the euro. Future currency movements will likely depend on oil supplies, Middle East tensions and upcoming inflation data.
