Dollar Soars as US-Iran Tensions Fuel Hawkish Fed Bets

The US dollar continued its upward trend on Monday, reaching near a two-month high as tensions between the US and Iran pushed up oil prices. The US-Iran standoff has heightened energy supply risks and inflation concerns, prompting investors to price in a more hawkish Federal Reserve.

Oil prices climbed over 1% with Brent crude futures last above $106 a barrel after President Donald Trump rejected a peace deal with Iran. This has led to a robust dollar index at 101.15, on track for a 1.7% gain in September, its best month since June.

According to Sim Moh Siong, FX strategist at OCBC, the greenback could overshoot in the near term if energy market tensions persist and inflation risks continue to build.

The market's focus is set to turn to US data releases this week, with the PCE Index on Wednesday and non-farm payrolls on Friday expected to be consistent with further policy tightening. Markets are currently seeing a 65% chance of a rate hike from the Fed when the central bank meets next at the end of October.