Dollar Gains Amid Escalating Mideast Tensions, Rising Oil Prices

The US dollar has experienced significant gains against major currencies as tensions between the United States and Iran escalated in the Middle East, leading to increased concerns about supply disruptions and rising oil prices. West Texas Intermediate crude surged by up to 10% to exceed $90 a barrel, further fueling inflation fears and increasing expectations of interest rate hikes from the US Federal Reserve. The probability of a September rate increase has risen to 60%, according to federal funds futures.

Hawkish comments from Fed Chair Kevin Warsh at the Jackson Hole economic symposium also contributed to the strengthening dollar. Inflation concerns have pushed US Treasury yields higher, with the 10-year yield reaching its highest level since November 2023. The increase in Treasury yields appears to be driven less by financing concerns and more by growing inflation fears.

The rising US Treasury yields and a stronger dollar led gold prices to plummet, falling below its 200-day exponential moving average before recovering on Wednesday and Thursday. A clear break below this important moving average could pave the way for further decline towards the $4,200 area, seen as a support zone following the interim high recorded on July 6.