FOREX: Dollar jumps on renewed Middle East attacks, Hormuz closure

SINGAPORE — The U.S. dollar strengthened against most major currencies on Monday as renewed conflict in the Middle East fueled concerns about rising inflation and increased expectations that central banks could raise interest rates sooner than previously anticipated.

The greenback gained 0.1% against the Japanese yen to 161.92 yen. The euro slipped 0.1% to $1.1403, while the British pound also fell 0.1% to $1.3383.

The Australian dollar declined 0.1% to $0.6942, and the New Zealand dollar dropped 0.1% to $0.5757.

Market sentiment was shaken after U.S. and Iranian forces exchanged missile and drone attacks over the weekend. Tehran said it targeted U.S. facilities across Gulf states and announced another closure of the Strait of Hormuz, a critical route for global oil shipments.

The escalation pushed oil prices higher when Asian markets reopened. Brent crude futures rose 3.3% to $78.49 per barrel.

"After the flare-up into the end of last week which continued over the weekend, the dollar has responded, and the crude oil price has been the driver," said Tony Sycamore, market analyst at IG in Sydney.

"This reignites concerns that if energy prices continue to rise, central banks could bring forward additional rate hikes."

Investors are increasingly betting that the U.S. Federal Reserve may raise interest rates twice before the end of the year.

According to CME Group's FedWatch tool, futures markets are now pricing in a 52.1% probability of two or more rate hikes by the Federal Reserve by its December meeting, up from 47.6% on Friday.

The U.S. dollar index, which measures the currency against a basket of six major peers, held steady at 101.07 after climbing as much as 0.2% earlier in the session to its highest level since July 8.

Analysts said inflation concerns are likely to remain the main focus for investors this week, with several key U.S. economic events scheduled.

These include the release of the Consumer Price Index (CPI) on Tuesday, Producer Price Index (PPI) data on Wednesday, and testimony from Federal Reserve Chair Kevin Warsh before the U.S. House and Senate.

Meanwhile, Reuters reported that the Bank of Japan may raise its economic growth forecast for fiscal 2026 and continue monitoring the risk of inflation overshooting its target. Sources familiar with the central bank's thinking said rising import costs from the weak yen and strong demand linked to artificial intelligence are offsetting some of the benefits from lower oil prices.

In the cryptocurrency market, bitcoin fell 0.6% to $63,770.42, while ether declined 1.1% to $1,801.28.

-Reporting by Gregor Stuart Hunter; Editing by Jamie Freed/Reuters