Dollar climbs as crude oil rally and Middle East tensions boost safe-haven demand

The U.S. dollar index rose 0.22% on Monday as a sharp rally in crude oil prices and climbing Treasury yields bolstered the greenback, while escalating Middle East tensions drove safe-haven demand.

Oil Surge Fuels Inflation Fears

WTI crude oil jumped more than 3.5% on Monday after stalled negotiations between Iran and Oman over a temporary shipping route through the Strait of Hormuz raised fresh concerns about global energy supply. Brent crude advanced more than 3% to around $86 per barrel as markets digested a weekend missile strike on a UAE tanker transiting the Strait and a Houthi attack on Saudi Arabia's Jazan refinery.barchart+1

The oil rally pushed 10-year Treasury note yields higher, strengthening the dollar's interest rate differentials against other major currencies. Markets are pricing in a 47% probability of a 25-basis-point rate hike at the Federal Reserve's September meeting, reflecting expectations that persistent energy-driven inflation could force further monetary tightening.tradingview+1

Yen Slides, Euro Edges Lower

The Japanese yen fell 0.73% against the dollar to a one-week low, pressured by higher crude prices that weigh heavily on Japan's energy-import-dependent economy. Japan's Nikkei 225 rallied 2% to a two-week high, further reducing safe-haven demand for the yen. Markets are discounting a 63% chance of a Bank of Japan rate hike in September, though the BOJ's 1.00% policy rate remains far below the Fed's 3.50%-3.75% target range.barchart+1

EUR/USD slipped 0.09%, weighed down by dollar strength and the negative implications of higher energy costs for Europe's import-heavy economy. Losses in the euro were contained after the Eurozone August Sentix investor confidence index rose to a six-month high of 0.9, beating expectations.barchart

Geopolitical Backdrop

President Trump signaled on Sunday that he would let economic pressure build on Iran rather than launch additional military strikes, describing the U.S. as only "semi-negotiating" with Tehran over the Strait of Hormuz. Iran last week issued a list of demands the U.S. must meet for the waterway to fully reopen, including the lifting of the naval blockade. The ongoing disruption to roughly one-quarter of the world's seaborne oil trade continues to underpin both crude prices and dollar safe-haven flows.wikipedia+2

Federal Reserve Chair Kevin Warsh separately reaffirmed his commitment to a 2% inflation target, even as mounting U.S. national debt complicates the path forward.ts2