U.S.-Iran Tensions Push Oil Prices Higher, Dollar Rises to Two-Month High
nashnova research
The dollar index rose to 101.15 on Sept 28, near a two-month high, with September gains of 1.7%; the US-Iran standoff lifting oil prices and rising rate-hike bets are driving the rally together, putting broad pressure on non-dollar currencies.
What is actually driving this dollar rally?
The dollar index gained 1.7% in September — its best month since June.
Two forces are working in tandem: US-Iran standoff → oil prices up → inflation fears → long-end Treasury yields higher, giving the dollar extra support; at the same time, expectations for further Fed tightening have climbed sharply.
This means → the dollar is not running on rate expectations alone. Geopolitical risk is providing a "second leg," which makes a near-term pullback harder to trigger.
Why is oil suddenly centre stage again?
Brent crude rose more than 1% on the day, trading above $106 a barrel.
The immediate trigger: Trump rejected a peace deal with Iran, and prospects for reopening the Strait of Hormuz — the chokepoint for roughly a fifth of global oil shipments — look dim. Energy-supply risk continues to build.
In plain terms = oil up → business costs up → prices harder to cool → the Fed harder to stop. This chain is feeding geopolitical risk directly into interest-rate pricing.
A 65% rate-hike probability — what is the market betting on?
The CME FedWatch tool shows the market is pricing a 65% chance of a hike at the late-October Fed meeting.
Two data releases this week are the key test: Wednesday's PCE price index — the Fed's preferred inflation gauge — and Friday's nonfarm payrolls. Both are widely expected to support the case for further tightening.
OCBC FX strategist Shen Muxiang noted that if energy tensions persist and inflation risks keep building, the dollar has room to overshoot in the near term; the bank's base case remains a moderate dollar appreciation into year-end.
Which non-dollar currencies are hurting the most?
The euro traded at $1.1379 and the pound at $1.3232, each down 0.1%, hovering near multi-month lows.
The yen fell 0.3% to 157.7 per dollar. Japan's Finance Minister Katayama Satsuki spoke with US Treasury Secretary Bessent; both reiterated that yen undervaluation is a concern, but verbal intervention has yet to reverse the slide.
Offshore renminbi weakened to 6.7235 per dollar after a three-day Trump-Xi summit failed to produce a clear breakthrough on key disputes. This reflects a market still pricing US-China relations with caution.
What other data drops should investors watch this week?
Beyond US PCE and payrolls, China's PMI lands Wednesday and Japan and eurozone CPI prints arrive Friday.
This means → within a single week, inflation and activity data from the world's three largest economies will hit the tape, testing whether the divergence in central-bank policy paths continues to widen.
The Reserve Bank of Australia is expected to raise rates by 25 basis points on Tuesday to 4.60%, near a fifteen-year high. Markets widely view this as the final hike of the current tightening cycle.
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