Dollar gains as Middle East conflict lifts oil, Fed hike looms

Oil prices have surged to $105 a barrel as concerns over a prolonged Middle East conflict grow, raising fears of accelerating inflation. The US-Iran conflict in the Gulf has intensified, causing crude oil and gas prices to rise sharply. Brent crude surpassed $100 a barrel and continues to climb, while US and UK long-term borrowing costs have hit their highest levels in decades. President Trump expressed doubts that the fighting would cease before the US mid-term elections in November.

Analysts warn that the convergence of higher energy costs and increased borrowing costs is straining financial markets. Chris Beauchamp, chief market analyst at IG, noted that investors worldwide are waking up to the crisis in oil markets. He cautioned that sustained surges in energy prices could severely impact the global economy.

The conflict has also disrupted Yemen's key Red Sea port, Mokha, operated by Iran-aligned Houthi forces, potentially leading to further shipping disruptions. Natural gas prices have skyrocketed in the UK, breaching 200p a therm for the first time since late 2022. Europe's storage levels are significantly lower than usual for this time of year, driving prices up as consumers prepare for winter.

While UK households are shielded from immediate price spikes by Ofgem's price cap, prolonged high prices could lead to steeper bills. The cap is set to rise by 3.6% in October, with the next adjustment coming in January. Energy cost increases have heightened inflation concerns, pushing up global bond yields. UK 10-year bond yields reached their highest since 2007, while those on 20- and 30-year bonds were at levels unseen since 1998.

The government's borrowing costs have risen, posing a challenge for public finances. However, this cost increase could also affect households through higher rates on financial products like fixed-rate mortgages.