Dollar firms as Gulf tensions, oil surge fuel Fed hike bets

The U.S. dollar maintained its strength against major currencies on Thursday, buoyed by escalating tensions in the Middle East and expectations of further interest rate hikes by the Federal Reserve. Renewed conflict in the Gulf region prompted investors to seek the safety of the dollar, while a sharp rise in oil prices intensified concerns about inflation.

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A flare-up of Middle East tensions has rattled global markets again and jammed a war risk premium back into asset prices.

Oil prices surged following U.S. military strikes on Iran, with Brent crude futures climbing significantly. This development has led analysts to predict that higher energy costs could accelerate the Federal Reserve's timeline for raising interest rates. The minutes from the June FOMC meeting also indicated a hawkish split among policymakers, driven by mounting inflation concerns, increasing the market's probability of a rate hike this year to approximately 87%.

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A jump in oil prices could bring forward the timing of a Fed hike.

The Japanese yen continued its downward trend, trading near a 40-year low against the dollar. While a brief, unexplained rebound last week was suspected to be the result of stealth intervention by Japanese authorities, the yen's struggle persists. Analysts suggest that the currency's future trajectory will depend on incoming U.S. economic data and developments in the Japanese government bond market. The U.S. dollar index, measuring its value against a basket of six major currencies, remained largely unchanged.

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Whether it becomes a more meaningful medium-term high will ultimately depend on incoming U.S. data and, to some degree, developments in the Japanese government bond market.