Dollar Jump on Renewed Middle East Attacks, Hormuz Closure Fuels Inflation Fears

U.S. and Iranian forces exchanged heavy missile and drone assaults over the weekend, with Tehran targeting U.S. facilities in states across the Gulf and stating it had again closed the vital Strait of Hormuz shipping route. The renewal of conflict pushed oil prices sharply higher. Brent crude futures rose as much as 9% at one point, settling at $83.30 a barrel, while in Asian trade the benchmark climbed 3-4% to the $78-$79 range.

The dollar index, which tracks the greenback against six major currencies, rose 0.21% to 101.27, after earlier touching its highest level since July 8. The euro fell 0.26% to $1.1383 and sterling lost 0.40% to $1.3352. The Australian dollar weakened 0.47% to $0.6917. However, the currency gave up some of those gains later in the session.

“After the flare-up into the end of last week which continued over the weekend, the dollar has responded, and the crude oil price has been the driver,” said Tony Sycamore, market analyst at IG in Sydney. “This reinflames concerns that if the energy prices rise from here, we could start to see rate hikes pulled forward.”

Traders increased their bets on Federal Reserve tightening. Fed funds futures are pricing an implied 50.9% to 52.1% probability of two or more rate increases by the time of the U.S. central bank’s December meeting, up from 47.6% on Friday, according to the CME Group’s FedWatch tool. Separately, LSEG data showed about 30 basis points of rate hikes priced in for this year.

“The dollar was obviously the big winner from the war last time. But it’s starting from a pretty different point this time, having strengthened quite a lot and there already having been a fairly lasting repricing of the Fed outlook,” said Thomas Mathews, head of markets for Asia Pacific at Capital Economics in Wellington. “It’s not clear to me the greenback would gain as much this time if the situation continued to worsen, which I think is probably reflected in trade so far.”

According to a report from Channel News Asia, Federal Reserve Governor Christopher said rates may need to rise “in the near term” if data shows inflation remaining well above the central bank’s 2% target. The report also noted President Donald Trump said the U.S. was reinstating a naval blockade on Iran and would ensure the Strait of Hormuz stays open for a fee.

The yen came under renewed pressure. The dollar was last up 0.46% at 162.43 yen, putting traders on alert for possible intervention from Japanese authorities as the currency continues to languish at 40-year lows. The yen and Japanese bonds had rallied on Friday after Finance Minister Satsuki Katayama said the government would seek ways to encourage pension funds, including the Government Pension Investment Fund, to invest more in Japanese financial assets. But that move reversed after Reuters reported that Tokyo had no imminent plans to change the asset allocations of its state pension funds. Two government sources told Reuters the initiative will not lead to immediate revisions to GPIF’s medium-term objectives.

Chris Turner, head of global markets at ING, said intervention was a prospect this week but cautioned that “intervention alone cannot reverse the current bull trend.” He added that “for that to happen, energy prices need to come lower and the Fed must conclude that it does not need to hike rates after all.”

Inflation risks are likely to remain in the spotlight. The U.S. calendar features consumer price index data on Tuesday, producer price indexes on Wednesday, and Federal Reserve Chair Kevin Warsh’s testimony before the House and Senate later in the week, Westpac analysts noted in a research report.

The Bank of Japan may revise up its economic growth forecast for fiscal 2026 and keep its focus on the risk of an inflation overshoot as rising costs from a weak yen and strong AI demand offset some declines in oil prices, three sources familiar with the central bank’s thinking told Reuters.

In cryptocurrencies, bitcoin lost 2.1% to $62,790.02 and ether shed 2.3% to $1,779.01.