Rising oil prices, bond market pressure, and renewed expectations of Federal Reserve tightening pushed the dollar higher across global markets.
The US dollar climbed to its highest level in six weeks on Wednesday as investors increasingly priced in the possibility that the Federal Reserve may need to keep interest rates higher for longer to contain inflation linked to the Iran war.
The growing uncertainty surrounding the conflict, combined with fears of prolonged disruption in global energy markets, has intensified pressure across financial markets. Investors are now reassessing expectations for monetary policy after crude oil prices surged and global bond yields moved sharply higher.
The dollar index, which measures the US currency against six major peers, briefly rose to 99.47, its strongest level since April 7, before stabilizing around 99.32 later in the session.
The index has already gained more than 1% in May as traders moved toward safe-haven assets while also increasing bets that the Federal Reserve could raise interest rates again before the end of the year.
Oil Prices and War Concerns Drive Market Anxiety
The market reaction followed renewed geopolitical tensions linked to the Iran conflict and fears surrounding the Strait of Hormuz, one of the world’s most critical energy shipping routes.
US President Donald Trump said the United States may need to strike Iran again, although he also suggested Tehran was seeking a deal to end the conflict.
The Strait of Hormuz remains central to global energy supply chains, and any disruption there immediately affects oil prices, inflation expectations, and currency markets worldwide.
Brent crude futures remained elevated at around $109.20 per barrel despite a slight pullback during trading. Oil prices are still nearly 50% higher than they were before the conflict escalated earlier this year.
Higher energy prices have strengthened fears that inflation could remain stubbornly high globally, forcing central banks to maintain tighter monetary policies for longer than previously expected.
Bond Market Sell-Off Strengthens the Dollar
At the same time, investors continued selling government bonds aggressively, driving yields sharply higher.
The yield on the US 30-year Treasury bond reached its highest level since 2007 as traders reacted to inflation concerns and the possibility of additional monetary tightening.
Analysts said rising Treasury yields have become one of the biggest drivers behind the dollar’s recent strength.
Derek Halpenny, senior currency analyst at MUFG, said markets still have room to price in additional tightening risks.
“There is scope for yields to move further higher,” Halpenny said.
He added that although the Federal Reserve may ultimately tighten less aggressively than some other major central banks, markets still appear to be underpricing the risks linked to surging oil prices.
Markets Shift Expectations Toward Possible Fed Rate Hike
Investor expectations around the Federal Reserve have shifted dramatically in recent weeks.
Before the conflict escalated, markets largely expected the Fed to cut interest rates twice before year-end. However, according to CME FedWatch data, traders are now pricing in more than a 50% probability of a rate hike by December instead.
The sharp reversal reflects growing fears that inflationary pressures tied to energy markets may force policymakers to delay easing plans or even tighten policy further.
Investors are now waiting closely for the release of minutes from the Federal Reserve’s latest meeting for additional clues about policymakers’ thinking.
Pressure Builds on Global Currencies
The stronger dollar has also increased pressure on major global currencies.
The euro briefly fell to a six-week low of $1.158 before recovering slightly, while the British pound remained mostly unchanged near $1.3401.
Meanwhile, the Japanese yen moved dangerously close to levels that previously triggered intervention by Japanese authorities.
The yen traded around 159 per dollar after weakening steadily alongside rising US bond yields.
Last month, Japanese authorities intervened in currency markets for the first time in nearly two years to slow the yen’s rapid decline.
US Treasury Secretary Scott Bessent added further pressure after signaling support for additional monetary tightening by the Bank of Japan.
Bessent said he believed BOJ Governor Kazuo Ueda would take the necessary steps if granted enough policy independence.
Christopher Wong, currency strategist at OCBC, warned that intervention risks may slow the dollar’s rise against the yen temporarily, but broader market forces still favor dollar strength unless Treasury yields begin easing.
Investors Brace for More Volatility
Financial markets now face a complex combination of geopolitical uncertainty, elevated oil prices, inflation fears, and changing central bank expectations.
As long as the Iran conflict continues threatening energy supply routes and commodity markets, investors are likely to remain cautious, while demand for safe-haven assets such as the US dollar may continue strengthening.
The situation also highlights how quickly geopolitical shocks can reshape global monetary expectations, especially when energy prices and inflation risks move sharply higher together.
The dollar index, which tracks the currency against six peers, rose 0.1% to its highest since April 7 at 99.47. Photo: AFP
Source: KT
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