Dollar holds firm at nearly two-week high as Middle East hostilities lift oil

On September 2, the U.S. dollar reached a two-week high as investors sought refuge in the American currency due to apprehensions about the economic fallout from the Middle East conflict and differing monetary policies worldwide. Tensions between Iran and its Arab neighbors escalated, leading to the heaviest exchange of fire between Tehran and Washington since July.

The greenback generally gains value when oil prices rise, as the U.S. economy is less vulnerable to energy shocks compared to other major economies, leading to increased demand and currency appreciation. While the European Central Bank nears the conclusion of its rate-hiking cycle, the Federal Reserve remains uncertain about initiating policy hikes in 2027.

George Brown, a senior economist at Schroders, predicted the ECB's tightening cycle to end by year-end, while the Federal Reserve would likely commence rate increases. This differential in interest rates could weaken the euro, which dropped 0.16 percent to $1.1575, its lowest level since August 20. The dollar index climbed to 99.865, the highest mark since August 17, while the euro weakened.

Meanwhile, the benchmark U.S. 10-year note yield surged to 4.8182 percent, the highest since November 2023. Despite concerns about rising energy prices and fiscal trajectory, the yen climbed 0.25 percent to 159.89 per dollar, nearing the psychologically significant 160-per-dollar mark.