The U.S. dollar climbed to a two-week high on Monday, driven by escalating Middle East conflict that pushed Brent crude to $108 a barrel and heightened expectations for a Federal Reserve interest rate hike this week amid mounting global inflation pressures.
Financial markets experienced severe turbulence as a combination of geopolitical conflict, surging energy costs, and shifting central bank expectations sent shockwaves across global bond and currency markets. The U.S. dollar index, which tracks the greenback against six major peers, rose nearly 0.6% during Monday’s trading session, touching 99.648—its highest level since September 2, according to reporting from Reuters.
Energy Shocks and Middle East Conflict Fuel Inflation Fears
The catalyst behind the latest market anxiety stems from intensifying hostilities in the Middle East. U.S. air strikes on Iranian targets and Houthi militant strikes on Saudi energy infrastructure have disrupted maritime traffic and energy supplies. Saudi Arabia shut down its main pipeline bypassing the Strait of Hormuz, compounding worries over global oil flows.
These supply disruptions sent Brent crude climbing sharply. While prices hit a four-month high near $110 a barrel in recent sessions, RBC Capital Markets warned that maritime traffic through the Bab el-Mandeb Strait remains gravely imperiled
by the Houthi advance, projecting that Brent could reach $121.99 a barrel later this year if a full-scale Saudi-Houthi war resumes in the region.
The energy shock immediately ricocheted through global debt markets. Benchmark 10-year U.S. Treasury yields climbed toward 5%, hovering near 4.9790%—their highest level in three years. Meanwhile, 30-year Treasury yields reached a fresh 19-year high of 5.3836%, and the two-year yield touched a 14-month high of 4.5961% after surging 12 basis points in a single prior session. Canada’s 10-year bond yield similarly climbed to 3.806% as surging oil prices kept global debt markets under heavy selling pressure.
Federal Reserve Rate Hike Expectations Surge
The surge in energy-driven inflation has fundamentally altered expectations for U.S. monetary policy. Money markets point to a roughly 90% chance that the Federal Reserve will raise interest rates on Wednesday, a dramatic leap from approximately 60% just a week earlier, based on CME Group’s FedWatch tool data cited by Reuters.
Federal Reserve Chairman Kevin Warsh laid the groundwork for potential tightening during his hawkish speech at the Jackson Hole symposium, stating that the central bank would have work to do
if inflation failed to cool. Echoing that stance, Federal Reserve Governor Michael Barr stated that if inflation does not cool quickly, it will be time for the central bank to increase interest rates.
A rout in global bond markets is intensifying and the dollar is climbing as an outbreak in hostilities between the U.S. and Iran revives inflation risks, raises the likelihood of interest rate hikes in the months ahead, and makes safe havens more appealing.
Karl Schamotta, chief market strategist at Corpay
Despite the prevailing hawkish sentiment, analysts caution that the dollar’s strength carries vulnerabilities. Scotiabank analysts led by Shaun Osborne noted in a client note that an unchanged decision from the Fed would be a shock for markets and a clear negative for the USD,
adding that a ‘dovish’ hike which does not obviously commit to additional moves would also likely weigh on the USD.
Global Currency Pressures and Central Bank Divergence
The greenback’s advance exerted heavy downward pressure on major foreign currencies. The euro tumbled to a one-month low of $1.153, while the British pound fell 0.5% to $1.3474. Currency strategists noted that compounding safe-haven demand from geopolitical tensions and AI-related equity selloffs left the U.S. currency firmly supported.
In foreign exchange markets, Gulf developments remain concerning, and some AI-related headlines are further weighing on equities — an environment where the dollar should remain supported,
observed Francesco Pesole, currency strategist at ING, as detailed by Reuters.
Meanwhile, the Japanese yen experienced notable volatility. After finding brief support earlier in the week following comments from U.S. Treasury Secretary Scott Bessent urging Bank of Japan Governor Kazuo Ueda to anchor inflation expectations and avoid excessive volatility, the wide interest rate differential between the U.S. and Japan continued to favor the dollar.
Lee Hardman, senior currency analyst at MUFG, noted that the U.S. dollar has strengthened modestly at the start of this week, encouraged by building expectations that the Fed will begin tightening monetary policy.
Markets now look toward upcoming U.S. consumer price inflation data and central bank meetings in both Washington and Tokyo to determine whether the current wave of global monetary tightening will broaden further across developed economies.
