Dollar jumps as renewed Hormuz attacks fuel inflation fears and rate-hike bets

The U.S. dollar rose across the board early Monday as a renewal of hostilities in the Middle East rekindled inflation fears and pushed traders to price in a higher probability of central bank tightening. By late Asian trading, however, the greenback gave back some gains in a session marked by volatility.

U.S. and Iranian forces exchanged heavy missile and drone assaults over the weekend, with Tehran targeting American facilities in states across the Gulf on Sunday and announcing it had again closed the vital Strait of Hormuz shipping route, according to Reuters.

Oil prices jumped as markets opened for the week. Brent crude futures rose more than 3% to trade near $78.50 a barrel, stoking concerns that rising energy costs could force global central banks to accelerate rate increases.

“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.”

**Rate-hike probabilities climb**

Fed funds futures now imply a roughly 50% to 52% probability of two or more rate hikes by the time of the U.S. central bank’s December meeting, up from a 47.6% chance on Friday, according to the CME Group’s FedWatch tool. Multiple Reuters reports cited slightly varying figures — 50.9%, 52.1%, and 50% — but all confirmed an upward shift in tightening expectations.

The U.S. dollar index rose as much as 0.3% to its highest level since July 8 before slipping later in the session. The index was last down 0.2% at 100.83, having earlier touched 101.13 in Asian trade.

Against the yen, the dollar advanced as much as 0.2% to 162.05 yen, putting traders on alert for possible Japanese intervention. The euro weakened 0.1% to $1.1403 before recovering to $1.1433, while sterling slipped to $1.3383 before returning to $1.339. The Australian dollar fell 0.1% to $0.6942 and the New Zealand dollar eased 0.1% to $0.5757.

**Analysts question durability of dollar gains**

Not all analysts expect the dollar to sustain its rally if tensions persist. Thomas Mathews, head of markets for Asia Pacific at Capital Economics in Wellington, noted that the greenback enters this episode from a stronger starting point than during the previous conflict.

“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,” Mathews said. “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.”

**Yen under pressure amid pension fund report**

The yen slid further against the dollar after a Reuters report that Japan’s government has no immediate plan to change the asset allocations of its state pension funds. The report said Tokyo is exploring ways to encourage the Government Pension Investment Fund (GPIF) to invest more in Japanese financial assets within existing benchmark ranges, but that will not lead to immediate revisions to GPIF’s medium-term objectives.

Finance Minister Satsuki Katayama had said Friday that the government would seek ways to encourage pension funds to make greater investments in Japanese financial assets, which briefly boosted yen and Japanese bonds. The subsequent clarification erased those gains and pushed the yen back toward 40-year lows.

Chris Turner, head of global markets at ING, said intervention remains a possibility this week but warned that “intervention alone cannot reverse the current bull trend. 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.”

**Data, testimony in focus**

Inflation risks will remain at the forefront this week with the release of U.S. consumer price index data on Tuesday, producer price gauges on Wednesday, and Federal Reserve Chair Kevin Warsh’s congressional testimony, Westpac analysts wrote in a research note.

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

In cryptocurrencies, bitcoin fell 0.6% to $63,770.42 and ether slipped 1.1% to $1,801.28, reflecting broad risk-off sentiment.