Dollar Rockets as US-Iran Tensions Escalate, Oil Prices Soar

The US dollar strengthened against major currencies as tensions between the US and Iran escalated in the Middle East. The escalation of hostilities led to a surge in oil prices, exceeding 5% on Wednesday, with WTI crude oil surpassing $90 per barrel. This rise in oil prices intensified fears of inflation and bolstered expectations that the Federal Reserve will raise interest rates when it meets next month.

The probability of a September rate hike has increased to 70%, according to Fed funds futures. Market participants are now factoring in around 65 basis points worth of rate increases by July 2027. Treasury yields have also risen, with the 10-year yield reaching its highest level since November 2023.

The Japanese yen rebounded on Thursday after Bank of Japan Governor Ueda indicated that officials will debate raising interest rates at their September meeting. However, New Zealand's kiwi fell sharply after the Reserve Bank of New Zealand raised interest rates by 25 basis points but sounded less hawkish than expected.