Dollar hits multi-week high as U.S.-Iran conflict lifts oil, reshapes rate bets

The U.S. dollar climbed to its highest level in several weeks on Wednesday as renewed fighting between the United States and Iran sent oil prices surging and drove investors toward the relative safety of American assets, reshaping rate expectations across major economies.

The dollar index, which measures the greenback against a basket of six currencies, rose to 99.808, while the euro slipped to around $1.1570 and the Japanese yen hovered near the psychologically sensitive 160-per-dollar level. Brent crude climbed above $95 a barrel after U.S. forces struck Iranian military targets and Tehran retaliated with missile and drone attacks against U.S. facilities across the Middle East, raising fresh concerns about energy supplies through the Strait of Hormuz.reuters+1

Rate Expectations Shift

The energy shock has complicated the monetary policy outlook globally. Markets are now pricing in roughly a 68% chance of a Federal Reserve rate hike at its September 15–16 meeting, up from around 40% a week earlier, according to CME Group's ↘ 0.27% FedWatch tool. The Fed has held its benchmark rate at 3.5%–3.75% since the beginning of 2026.businessupturn+1

"We expect the ECB to finish its hiking cycle by the end of the year, while the Federal Reserve will likely be just beginning to raise rates," said George Brown, senior economist at Schroders, who added that widening rate differentials should push the euro toward $1.10 by year-end.reuters

The U.S. 10-year Treasury yield rose as high as 4.818%, its firmest since late 2023, while Japan's benchmark 10-year yield extended its rally to 3.01%. Bank of Japan Governor Kazuo Ueda said consecutive rate hikes could be a possibility, helping the yen hold just below 160 per dollar.reuters

Emerging Markets Feel the Strain

The dollar's strength reverberated through emerging markets. The Indian rupee fell 2 paise to 94.97 against the dollar on Wednesday, with Brent crude and rising Treasury yields weighing on sentiment. The Reserve Bank of India had intervened aggressively on Tuesday, selling at least $5 billion in the spot market to defend the 95 level amid sustained foreign portfolio outflows.hdfcsky+2

India's Sensex fell sharply in early trading on Wednesday as higher oil prices and elevated bond yields fueled inflation concerns. Foreign portfolio investors have withdrawn approximately 2 trillion rupees from Indian equities over two months, the worst capital flight since India opened to overseas investment in 1993, according to data cited by the Financial Times.business-standard+1

What Comes Next

The New Zealand dollar also fell more than 1% against the greenback even after its central bank raised rates, reflecting concern that the accompanying guidance was less hawkish than expected. Preliminary data showed only four commodity vessels crossed the Strait of Hormuz on Tuesday, compared with a 10-day average of about 13, underscoring the severity of the disruption.businessupturn+1

"Any de-escalation of tensions may support the rupee at lower levels," said Anuj Choudhary of Mirae Asset Sharekhan, but added that traders remain focused on upcoming U.S. employment data and the Fed's September decision.dtnext