The dollar index climbed to 99.2 on Monday, extending its 0.9% advance from May, as renewed setbacks in US–Iran negotiations heightened geopolitical uncertainty and drove oil prices higher. Iranian media reported that Tehran had suspended communications with Washington following attacks in Lebanon and was preparing to fully close the Strait of Hormuz. Earlier exchanges of military strikes between the US and Iran had already cast doubt on the prospects for a diplomatic settlement.
A prolonged closure of the Strait of Hormuz would push energy prices higher and intensify inflationary pressures, bolstering expectations that the Federal Reserve will keep interest rates elevated for an extended period. Market pricing currently assigns a probability of more than 50% to a Fed rate hike in December. The dollar initially strengthened at the onset of the conflict, supported by safe-haven flows and the view that the US economy is comparatively less vulnerable to energy-driven inflation. Since then, however, it has given back part of those gains.
