The dollar index traded above 99.5 on Monday, extending gains from the previous session as escalating tensions in the Middle East bolstered safe-haven demand. The US-Israel conflict with Iran entered its fourth week with no sign of de-escalation. President Donald Trump threatened strikes on Iranian power plants if the Strait of Hormuz is not reopened, while Tehran warned it would target key US and Israeli assets across the region if its energy infrastructure is attacked.
Persistently elevated oil prices continued to stoke inflation concerns and reduced the likelihood of a near-term Federal Reserve rate cut, with some market participants now even pricing in the possibility of a rate hike toward the end of the year. Last week, the Fed left its policy rate unchanged as expected, with Chair Jerome Powell stating it was too early to fully assess the economic implications of the Iran conflict. The ECB, BOE, and BOJ also kept interest rates on hold but signaled their willingness to tighten policy further should inflationary pressures remain elevated.
