Dollar steadies as US-Iran stand-off lifts oil and Treasury yields, boosting Fed hawkish bets

Global markets opened the week with a focus on an intensifying US-Iran stand-off. That geopolitical stress pushed Brent crude higher, lifted long-term US Treasury yields above 5%, and helped keep the dollar firm against major peers. At the same time, central bank policy expectations shifted toward further tightening as markets priced in a higher chance of additional Fed hikes.

• Dollar index: ~101.20, near a two-month high.
• Euro: $1.1370, hovering near two-month lows versus the dollar.
• Sterling: $1.3250, close to recent three-month lows.
• Brent crude futures: settled around $105.28 per barrel after the US rejected an Iranian offer.
• US Treasury yields: remained above 5% at multi-decade highs, supporting the dollar.
• Yen: around 157.39 per dollar.
• AUD: about $0.7015. NZD: about $0.5664. Offshore yuan: ~6.713 per dollar.

Why oil and yields matter for the dollar

Higher oil prices directly affect inflation expectations in energy-importing economies, which can prompt central banks to consider tighter policy. In this episode, a breakdown in US-Iran negotiations and a US presidential rejection of an Iranian proposal to reopen the Strait of Hormuz were cited as immediate drivers of a renewed oil risk premium. That pushed Brent above $105 and bolstered longer-dated US Treasury yields.

Rising yields make dollar-denominated assets relatively more attractive to global investors, which supports the currency. Traders and strategists referenced the combination of energy supply risk and robust US economic fundamentals as the engine behind a shift toward more hawkish Fed pricing.

• Euro and sterling fell against the dollar largely because higher US yields widened the carry and yield differentials.
• The yen remained sensitive to verbal interventions: Japanese officials and US Treasury officials reiterated shared concern about yen weakness, but market participants noted a tension between Japan's anti-weakness rhetoric and rising US yields driven by the same geopolitical shock.

Markets were also focused on upcoming US economic releases: the Personal Consumption Expenditures (PCE) index midweek and US nonfarm payrolls on Friday. Those data points will affect the Fed's near-term policy calculus. At the time of reporting, CME's FedWatch tool priced a roughly 73% probability of a quarter-point Fed hike in October, with traders nearly fully pricing in four quarter-point hikes over the next 12 months.

• Any diplomatic progress or further escalation in the US-Iran talks that could reverse or deepen the oil price spike.
• PCE inflation readings and payrolls, which could confirm whether the Fed must act more aggressively.
• Moves in long-term Treasury yields: sustained rises would likely keep the dollar supported, while a reversal would ease pressure on risk-sensitive currencies.
• Coordination signals between Tokyo and Washington on the yen versus the practical limits imposed by rising US yields.