Dollar holds 18-month high as Gulf tension, US inflation keep investors on edge

The US dollar maintained a strong posture, holding near an 18-month high as escalating geopolitical tensions in the Gulf and upcoming domestic inflation figures kept global financial markets on edge. Safe-haven demand surged following a weekend of renewed conflict in the Middle East, overshadowing diplomatic announcements and driving investors toward the greenback at the expense of other major currencies.

According to Live — Dollar holds 18-month high as Gulf tension, US inflation keep investors on edge, the dollar index tracking the US currency against six peers advanced 0.37% to reach 102.58. Reporting from Yahoo Finance — Dollar hovers near 18-month high as Gulf unrest, US inflation keep investors on edge and CNBC, Dollar stays near 18-month high as Mideast conflict, inflation data in focus confirmed that market sentiment soured sharply after Yemen's Iran-backed Houthi forces escalated strikes on Saudi Arabia, alongside weekend attacks on two oil tankers. Brent crude futures jumped about 2.3% to $107.17 a barrel, hovering near a two-week high and resting nearly 45% above levels recorded before the outbreak of the US-Israeli war with Iran.

Media additions

The energy shock rippled across international markets, complicating central bank outlooks and bond yields. Meanwhile, Cleveland Fed President Beth Hammack said on Monday that the Federal Reserve should move "relatively quickly" to a restrictive policy to control inflation she sees as more broad based.

Market positioning reflects profound caution. Weekly regulatory data cited across reporting channels indicated that speculative bullish positions on the dollar surged to about $36 billion, up from $8.4 billion three weeks ago, largely at the expense of the euro. Traders and analysts offered varying perspectives on whether this momentum can endure.

"We aren’t convinced this latest bout of risk aversion will translate into sustained dollar strength," said Joel Kruger, market strategist at LMAX Group in London, citing cooling economic data, inflation pressures moderating, and much of the Fed's expected rate hikes already priced into the market. "We see limited scope for additional dollar upside."

Joel Kruger, market strategist at LMAX Group, via Euronext and Yahoo Finance

Kruger pointed to cooling broader economic data, moderating domestic inflation pressures, and the reality that expected rate hikes are already priced into the market. Conversely, other market observers emphasized that upcoming data releases will dictate the near-term trajectory.

"The real focus is on the CPI number this week -- it is likely to be running hot," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. He added that a rate hike before an election is so uncommon that "the bar is kind of high" for the Fed to act.

Marc Chandler, chief market strategist at Bannockburn Global Forex, via Euronext and Yahoo Finance

Traders are pricing in a 78% chance of the Fed standing pat this month, up from 51% a month earlier, the CME FedWatch tool showed. This pause expectation comes despite the central bank raising rates last month for the first time since 2023 to rein in inflation.

Europe faced its own distinct currency and debt pressures. The euro fell 0.4% to $1.1156, near a 17-month low, after clocking a fifth straight week of losses last week, driven by investor angst around France's fiscal health before the 2027 presidential election. The spread between French 10-year yields and safer German yields traded at 140 basis points.

Global bond markets experienced sharp selloffs that have driven borrowing costs across the globe to multi-decade highs. "There's been no improvement and no real clear guidance as to what's going to make things better in the short term," said Dan Tobon, head of G10 FX strategy at Citi in New York. "What's the reason to buy European debt, to buy euro here? It's hard to find one, and so we just kind of keep drifting off."

What to Watch Next

• US Consumer Inflation Report: Scheduled for Wednesday release, this consumer price index data point represents one of the final major economic indicators ahead of the Federal Reserve's policy meeting.
• Federal Reserve Policy Decision: Markets will look for confirmation whether policymakers will heed calls for restrictive policy or hold rates steady as indicated by current CME FedWatch pricing.
• Middle East Developments: Ongoing security incidents involving maritime shipping lanes and energy infrastructure in Saudi Arabia will continue to dictate oil price volatility and safe-haven currency flows.
• European Fiscal Policy: Continued monitoring of French debt yields and broader eurozone fiscal discipline measures ahead of political milestones.