The US dollar remained close to a two-month high on Monday, despite coming under modest selling pressure. Rising oil prices and bond yields continued to support the greenback as tensions between the US and Iran remained in focus.
Investors are also preparing for a busy week of economic data. Key releases could provide fresh signals on inflation and the future direction of central bank monetary policy.
Euro and Pound Remain Under Pressure
The euro edged lower to around $1.1386, remaining close to a two-month low against the US dollar. EUR/USD is also heading toward a decline of roughly 2% in September.
The British pound was relatively stable near $1.3247 but remained close to its lowest level in three months. The move followed another interest rate warning from Bank of England Governor Andrew Bailey.
Meanwhile, the US Dollar Index slipped slightly to around 101.12. Despite the decline, the index remains on course for a monthly gain of approximately 1.7%, which would mark its strongest monthly performance since June.
US-Iran Tensions Push Oil Prices Higher
Oil prices jumped more than 3% on Monday as geopolitical tensions continued to affect global energy markets.
Brent crude futures climbed above $107 per barrel after US President Donald Trump rejected a peace agreement with Iran aimed at resolving the conflict and reopening the Strait of Hormuz.
Concerns over energy supplies have added to existing inflation risks. At the same time, resilient US economic fundamentals have encouraged traders to adopt more hawkish expectations for Federal Reserve monetary policy.
Higher long-term US Treasury yields have provided additional support for the dollar.
OCBC FX strategist Sim Moh Siong said the greenback could move beyond current expectations in the short term if energy-market tensions remain elevated and inflation risks continue to increase.
The bank’s base scenario still points toward a moderate US dollar rally into the end of the year.
Federal Reserve Rate Hike Expectations Rise
Attention is now shifting toward major US economic releases scheduled throughout the week.
The PCE Index, a closely watched measure of inflation, is due on Wednesday. The US non-farm payrolls report will follow on Friday.
Both releases could influence expectations for the Federal Reserve’s next monetary policy decision.
Markets currently indicate around a 65% probability of a Fed interest rate increase at its next meeting at the end of October, according to CME Group’s FedWatch tool.
Investors will also monitor China’s PMI figures on Wednesday, ahead of the country’s week-long National Day holidays. Eurozone inflation data is scheduled for Friday.
Japanese Yen Weakens Against the Dollar
The Japanese yen fell around 0.3% to 157.7 per US dollar, giving back some of Friday’s gains.
Japan’s Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent reaffirmed plans to strengthen cooperation as the two countries seek to address weakness in the Japanese currency.
At the same time, Japanese data showed that service-sector inflation accelerated in August at its fastest annual pace in more than two years.
The figures highlighted increasing price pressures and strengthened expectations that the Bank of Japan could move more quickly with additional interest rate increases.
Australian Dollar Awaits RBA Decision
The Australian dollar traded around $0.70125, while the New Zealand dollar gained approximately 0.1% to $0.5670.
The Reserve Bank of Australia is expected to increase interest rates by 25 basis points on Tuesday. Such a move would take its benchmark rate to 4.60%, close to a 15-year high.
The expected increase could also represent the final rate hike of the RBA’s current monetary tightening cycle.
Chinese Yuan Edges Higher
Elsewhere in currency markets, the offshore Chinese yuan strengthened slightly to around 6.714 per US dollar.
The move followed a three-day summit between US President Donald Trump and Chinese President Xi Jinping. The talks concluded without major publicly announced breakthroughs on several contentious issues between the two countries.
Overall, the US dollar remains supported by higher Treasury yields, rising oil prices and expectations for tighter Federal Reserve policy. Upcoming US inflation and employment data could now determine whether the dollar extends its recent rally.
