Dollar rallies as oil prices jump and AI fears knock markets

On Monday, the US dollar reached a two-week high as Middle East conflict boosted oil prices and investors sought the stable currency. The yen weakened, while warnings from AI company CEOs and expectations of a Federal Reserve rate hike on Wednesday supported the dollar. The US dollar index rose almost 0.4%, reaching 99.6, its highest since September 2.

The euro fell to a one-month low of $1.153, and the British pound decreased by 0.3% to $1.35. Oil prices surged, with Brent crude increasing 3% to $108 a barrel due to Houthi strikes on Saudi Arabia and supply concerns. Gulf developments remained worrying, and AI-related headlines further weighed on equities. Currency strategist Francesco Pesole noted the dollar's support in the current environment.

The Japanese yen saw some of its recent gains lost, with the dollar rising to 154.55 yen, up from last week's low of 153. The Fed's interest rate hike this week is a key market question, with a 90% chance according to CME Group's FedWatch tool. However, the Fed may refrain from aggressive hikes in an election year, potentially limiting the dollar's gains.

Bond yields have climbed to multi-year or multi-decade highs worldwide, impacting the FX market minimally as they move in tandem. Speculators have turned to a net long position in the Japanese currency for the first time since February, signaling a shift in sentiment. The Bank of England is expected to maintain interest rates on Thursday, but a rate hike later this year is anticipated.