The renewed strength of the greenback comes amid growing uncertainty surrounding the ongoing Iran conflict, which has unsettled global financial markets, driven oil prices sharply higher, and triggered heavy selling across bond markets worldwide.
Investors are now recalibrating expectations for global monetary policy as fears mount that sustained energy price shocks could reignite inflation pressures just as many central banks were preparing to ease interest rates.
The U.S. dollar index, which measures the currency against a basket of major peers, hovered around 99.306 after climbing more than one percent this month on increased safe-haven demand and changing expectations around Federal Reserve policy.
Market sentiment was rattled further after U.S. President Donald Trump suggested Washington could launch another strike on Iran if necessary, although he also indicated Tehran appeared interested in negotiating an agreement to end the conflict.
The prolonged uncertainty has particularly affected energy markets. Brent crude traded above $110 per barrel, significantly higher than levels recorded before the outbreak of hostilities in late February. Investors also remain uneasy over the continued disruption around the Strait of Hormuz, one of the world’s most critical shipping routes for oil and commodities.
The spike in energy costs has complicated the global inflation outlook, leading traders to rethink earlier assumptions that major central banks would soon begin cutting rates.
According to CME FedWatch data, traders are now pricing in more than a 50 percent probability that the Federal Reserve could raise interest rates again in December — a dramatic shift from previous expectations for at least two rate cuts before the escalation of the Middle East crisis.
Attention is now turning to the release of minutes from the Federal Reserve’s latest policy meeting, which investors hope will provide further clues about the central bank’s thinking on inflation and future rate moves.
Carol Kong, currency strategist at Commonwealth Bank of Australia, said the Fed minutes are likely to reinforce expectations of tighter monetary policy.
“We continue to expect the FOMC to start a tightening cycle in December,” Kong said, noting that more Fed officials have recently expressed concern about persistent inflationary pressures in the United States.
The stronger dollar weighed heavily on major currencies, with the euro slipping to around $1.16025 after touching its weakest level since early April. The British pound also remained under pressure near $1.34, close to a six-week low.
Commodity-linked currencies struggled as risk appetite weakened globally. The Australian dollar traded at $0.7105, while the New Zealand dollar hovered near $0.5834, both remaining close to five-week lows.
Emerging-market currencies have been among the biggest casualties of the latest wave of dollar strength and rising Treasury yields. The Indian rupee and Indonesian rupiah both extended losses to fresh record lows as investors pulled funds toward safer U.S. assets.
Meanwhile, the Japanese yen once again returned to levels that previously triggered intervention by Japanese authorities.
The dollar climbed close to the psychologically important 160-yen mark, reviving speculation that Tokyo could step back into currency markets to support the battered Japanese currency.
Japanese officials had intervened several times in late April and early May in an attempt to halt the yen’s rapid decline, though the impact proved temporary.
On Wednesday, the yen traded slightly firmer at 158.93 per dollar after comments from U.S. Treasury Secretary Scott Bessent appeared to support the possibility of additional interest rate hikes by the Bank of Japan.
Bessent said he was confident Bank of Japan Governor Kazuo Ueda would take necessary action if given sufficient independence by the Japanese government, a remark analysts interpreted as Washington backing tighter Japanese monetary policy.
Christopher Wong, currency strategist at OCBC, warned that while intervention risks may discourage aggressive bets against the yen, broader market fundamentals continue to favour dollar strength.
“Intervention risk should make markets more cautious about chasing dollar/yen higher, but unless U.S. Treasury yields and the broad USD soften, official action may only temporarily slow the move rather than reverse it,” Wong said.