The US dollar reached a seven-week high on Wednesday as investors sought safety amid renewed military tensions in the Middle East. Increasing oil prices and unstable global interest rates further supported the greenback.
The United States and Iran returned to a heightened military confrontation after the biggest exchange of fire in weeks. The escalation raised concerns for a broader disruption to energy supplies and its impact on the global economy.
The dollar index rose 0.20% to 99.865, while the euro and several other currencies weakened against the greenback. The US currency also benefited from its traditional safe-haven status during periods of geopolitical uncertainty.
The US economy is relatively less exposed to higher energy prices, supporting demand for the dollar. Investors are therefore reassessing the outlook for currencies such as the euro and yen as the energy shock develops.
The Strait of Hormuz also emerged as a key market concern. Shipping traffic through the strategic waterway reduced sharply amid the escalation. Thus, worsening worries over global oil supplies.
The rise in energy prices complicated the outlook for central banks. Persistent inflation could limit the scope for monetary easing and, in some cases, force policymakers to consider further rate increases.
Markets have raised the probability of a Federal Reserve rate hike in September to 68%, from around 40% a week earlier. The prospect of higher US rates has supported Treasury yields and increased the appeal of dollar-denominated assets.
The US 10-year Treasury yield climbed as high as 4.818%, its strongest level since November 2023. Higher yields generally make US assets more attractive to international investors.
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