Dollar gains as U.S.-Iran tensions lift oil and strengthen Fed hike bets

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Dollar gains on Fed, oil

Highlights

The dollar index rises to 101.15, up 1.7% in September—its strongest monthly gain since June—driven by U.S.-Iran standoff and firmer Fed tightening bets.
Brent crude climbs over 1% to above $106 a barrel after President Trump rejects a peace deal with Iran, escalating energy supply risks and fueling inflation concerns.
CME FedWatch shows markets pricing a 65% probability of an October Fed rate hike as investors await key U.S. PCE and non-farm payrolls data this week.

Oil surge and policy expectations support dollar

As reported by Reuters, the dollar edges higher on Monday as the U.S.-Iran standoff pushes oil prices up and reinforces market expectations that the Federal Reserve could keep tightening policy.

The euro and sterling are both 0.1% weaker against the dollar, trading at $1.1379 and $1.3232 respectively, while the dollar index is slightly firmer at 101.15 and is on track for a 1.7% rise in September, its strongest monthly performance since June.

Brent crude futures climb more than 1% to above $106 a barrel after U.S. President Donald Trump rejects a peace deal with Iran aimed at resolving the conflict and reopening the Strait of Hormuz. Higher energy supply risks, together with solid U.S. fundamentals and elevated long-end Treasury yields, are adding to inflation concerns and supporting the U.S. currency.

Sim Moh Siong, FX strategist at OCBC, says the greenback could overshoot in the near term if energy market tensions persist and inflation risks continue to build. He adds that the bank's base case remains for a moderate U.S. dollar rally into year-end.

Data calendar sharpens focus on global rate outlook

Attention is turning to key U.S. releases later in the week, with the PCE Index due on Wednesday and non-farm payrolls on Friday, both seen as data points that could remain consistent with further policy tightening. Markets currently price in a 65% chance of a Fed rate hike at the central bank's next meeting at the end of October, according to CME Group's FedWatch tool.

Elsewhere, traders are also monitoring China PMIs on Wednesday before the week-long National Day holidays, as well as Japan and euro zone CPI readings on Friday. In Asia-Pacific trading, the yen is down 0.3% at 157.7 per dollar after gaining on Friday following a call between Japan Finance Minister Satsuki Katayama and U.S. Treasury Secretary Scott Bessent, in which they reaffirmed concerns over yen undervaluation and pledged closer cooperation.

The Australian dollar buys $0.7017, down 0.07%, while the kiwi is flat at $0.5661. Markets expect the Reserve Bank of Australia to raise rates by 25 basis points to 4.60% on Tuesday, which is seen as the final increase in the current tightening cycle, while the offshore yuan weakens to 6.7235 per dollar after the three-day summit between Trump and Chinese President Xi Jinping produces no major public breakthroughs.

Our earlier coverage of the U.S.-Iran talks over reopening the Strait of Hormuz described how negotiations stalled after Washington rejected Tehran’s conditional proposal, keeping a key shipping route at the center of market attention. We also noted that continued regional security risks and disrupted Middle East energy flows were sustaining elevated crude prices and adding to global inflation concerns.

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