Dollar Advances on Middle East Conflict

The U.S. dollar jumped against major peers as a renewed military conflict in the Middle East drove up crude oil prices and revived inflation concerns. The combined moves matter because rising energy costs are shifting interest rate expectations upward, forcing currency traders to price in a higher probability of Federal Reserve rate hikes by the end of the year.

Strait of Hormuz Closure Lifts Dollar

U.S. and Iranian forces exchanged heavy missile and drone strikes over the weekend, resulting in Tehran closing the Strait of Hormuz. The escalation quickly reversed Friday‘s crude oil price drop, which had seen West Texas Intermediate crude slip to $71.33 a barrel on hopes of mediated negotiations. As trading opened in Asia, crude oil surged 3.3% to $78.49 a barrel. In currency markets, the dollar index climbed to 101.07. The U.S. dollar gained 0.1% against the Japanese yen to trade at 161.92, while the euro weakened 0.1% to $1.1403 and the British pound slipped 0.1% to $1.3383. Traders are repricing inflation risks ahead of U.S. consumer and producer price index data releases, alongside Federal Reserve Chair Kevin Warsh’s scheduled testimony before Congress. Federal funds futures now show a 52.1% probability of two or more rate hikes by December, an increase from 47.6% prior to the weekend.

Bank of Japan Weighs Currency Pressures

The continued depreciation of the Japanese yen is directly influencing central bank policy discussions in Tokyo. The Bank of Japan may revise its economic growth forecast for fiscal 2026 upward, according to sources familiar with the internal discussions. Policymakers are maintaining a strict focus on the risk of an inflation overshoot. This price pressure is being generated as higher import costs from a weak yen, combined with strong business demand linked to artificial intelligence, counteract the effect of earlier drops in oil prices.

New Zealand Dollar Ignores Domestic Services Growth

The New Zealand dollar slid 0.1% to trade at $0.5757 against the U.S. dollar, dropping alongside the Australian dollar which fell to $0.6942. The currency decline occurred despite a positive domestic economic release. The BusinessNZ Performance of Services Index returned to expansion in June, reaching a score of 50.6 compared to a revised 48.0 in May. The survey indicated new orders and supplier deliveries are expanding. Local analysts expect the service sector recovery to help bring economic growth back toward 2.0%, yet the broad demand for the U.S. dollar overshadowed localized economic improvements.

These combined market moves show that short-term changes in the energy sector are currently dictating global currency pricing. By quickly translating crude oil supply disruptions into expectations for prolonged higher interest rates in the United States, cross-border flows are favoring the greenback and suppressing the immediate impact of regional economic data and policy considerations.