Dollar hits two-week high with Middle East conflict in focus

The US dollar reached a two-week high on Wednesday as tensions between the US and Iran escalated following a significant exchange of fire. Investors turned to the US currency amid worries about the economic impact of the energy crisis and the divergent monetary policy approaches of major economies. The greenback's strength is often attributed to the US economy's lower vulnerability to energy shocks compared to other major economies, leading to increased demand and a preference for the dollar over currencies like the euro and yen.

Financial experts anticipate that the European Central Bank (ECB) will conclude its rate-hiking cycle by the end of the year, while the Federal Reserve is only just beginning its rate hikes for 2027. This widening gap between interest rates is expected to weaken the euro and strengthen the dollar. However, a sell-off in US Treasuries due to concerns over inflation and the country's fiscal situation could put downward pressure on the dollar as rising debt levels and persistent price pressures raise doubts about the long-term viability of US assets.

The dollar index, which tracks the greenback's performance against a basket of currencies including the yen and euro, increased by 0.11 percent to 99.76, marking its highest level since August 17. Meanwhile, the euro experienced a 0.16 percent decline, settling at $1.1575, the lowest point since August 20. The yield on the benchmark US 10-year note surged to 4.812 percent, its highest since November 2023, before cooling to 4.804 percent.

Markets are now projecting a 70 percent chance of a Federal Reserve rate hike in September, up from around 40 percent a week prior, according to CME Group's FedWatch tool. Japanese markets responded positively, with the yen climbing 0.45 percent against the dollar to 159.50 per dollar, approaching the psychologically significant threshold of 160 per dollar. This rise in the yen comes as some analysts consider the possibility of consecutive rate hikes by the Bank of Japan (BOJ).

US Treasury Secretary Scott Bessent expressed strong support for decisive monetary actions to address the yen's weakness during a meeting with BOJ Governor Kazuo Ueda. In response, global markets across Asia experienced declines, with tech-driven economies like Japan and South Korea particularly hard hit, falling by 3.9 percent and 4 percent respectively.

Financial hubs such as Hong Kong, Shanghai, Sydney, Taipei, Mumbai, Bangkok, Jakarta, and Manila also faced losses. In contrast, London, Frankfurt, and Paris witnessed a drop in their main indexes during the morning trading session.