The U.S. dollar climbed from a two-month low as oil prices rose on Middle East tensions and investors awaited key inflation data, with markets weighing the Federal Reserve’s potential rate hike in September.
The U.S. dollar edged higher on Monday, climbing from a two-month low against major currencies as oil prices surged on concerns over the Strait of Hormuz and investors braced for U.S. inflation data. The euro weakened slightly to $1.1551, while the yen fell to 158.30 per dollar, though it remained above its recent multi-decade low of 164.96. The dollar index, which tracks the currency against six major peers, rose 0.06% to 99.7, recovering some ground after hitting its lowest level since June.
Dollar Gains as Oil Prices Rise on Geopolitical Fears
Oil prices climbed 1.4% on Monday, with Brent crude futures hitting $85 per barrel, driven by uncertainty over the reopening of the Strait of Hormuz. Iran reportedly reached a deal with Oman to establish new shipping lanes, but U.S. officials emphasized that Tehran must meet additional conditions, leaving the energy outlook murky. The tension fueled demand for safe-haven assets, though the dollar’s gains were tempered by lingering questions about the Federal Reserve’s next move.
Markets need confirmation that softer labor demand is translating into sustainable disinflation rather than simply weaker growth,
said Geoff Yu, a senior EMEA market strategist at BNY, in a note. Perceptions around U.S. inflation data will likely be the biggest swing factor this week.
The yen’s decline came despite intervention by Japan and the U.S. to stabilize its value. Japanese officials reiterated their willingness to take further action if needed, with Bank of Japan data showing Tokyo may have spent up to $59 billion on yen purchases. The currency rose 0.4% against the euro to 180.70, its strongest level since mid-November 2025, though it remained below the 164.96 threshold that analysts consider a critical intervention zone.
Fed’s September Hike Odds Dip as Jobs Data Soothes Fears
The chances of a Federal Reserve rate hike in September fell to 44% from 67% a week earlier, according to futures markets, as Friday’s jobs report showed the U.S. economy unexpectedly shed jobs in July. The report dashed expectations for a near-term rate increase, with U.S. Treasury yields declining and the 10-year note yield settling at 4.637%.
The core CPI (USCPFY=ECI) is expected to rise 0.2% month-on-month in July, pushing the annual rate to 2.5% after a 2.6% reading in June. Analysts are closely watching the data for signals on the Fed’s policy path, with some suggesting the central bank may delay hikes until December if inflation remains stubbornly elevated.
Emerging Markets and Currencies React to Dollar Volatility
Emerging-market stocks and currencies gained traction as expectations for a Fed rate hike eased. An MSCI index of developing-market stocks rose 0.7%, erasing losses from the previous week, while an emerging-market currency index climbed 0.2%. The Indonesian rupiah led the advance, with the Bloomberg Dollar Spot Index edging higher after dropping 0.4% to a two-month low on Friday.
Asian currencies also showed resilience, with the New Zealand and Australian dollars slipping 0.1% to $0.7062 and $0.5887, respectively. The Reserve Bank of Australia is expected to hold its key rate at 4.35% for the rest of the year, as policymakers balance inflation concerns with economic growth risks.
The euro remained stable at $1.1523, having touched a 1-1/2-month high of $1.1559 earlier in the week. Analysts noted that the dollar’s lack of broad weakness could be tied to uncertainty over the Fed’s September decision. The fact that the dollar is not broadly weaker probably owes to the unresolved issue of whether the Federal Reserve will hike in September,
said Chris Turner, global head of forex at ING.
Looking ahead, the focus will shift to the U.S. nonfarm payrolls report due on Friday, which could provide further clarity on the Fed’s next steps. Meanwhile, the European Central Bank’s stance on currency intervention remains unclear, with HSBC’s Paul Mackel suggesting that coordinated action between the ECB and the Fed could signal a broader effort to strengthen the yen.
