US dollar rallies as oil prices jump and AI fears knock markets

The US dollar surged to a two-week high on Monday (Sep 14), as conflict in the Middle East drove up oil prices, prompting investors to seek the safe-haven currency. The US dollar index, which measures the dollar's strength against six major currencies, rose nearly 0.4 percent to 99.6, its highest level since September 2. This gain was fueled by warnings from executives of frontier companies about the potential risks of artificial intelligence (AI), which weighed on stock markets and also bolstered the dollar.

Simultaneously, the euro fell to a one-month low of $1.153, while the British pound slipped 0.3 percent to $1.35.

Oil prices experienced a significant jump, boosting global bond yields back to multi-year highs. Brent crude, a key benchmark, increased by 3 percent to $108 a barrel. The conflict involving Houthi rebels in Saudi Arabia, which shut down the kingdom's main pipeline for circumventing the Strait of Hormuz, further heightened concerns over energy supplies.

Diplomatic efforts to ease tensions between the United States and Iran appeared to falter, with a scheduled meeting between Tehran and Gulf governments postponed. Additionally, attacks on ships in the region added to worries about potential disruptions to energy supplies.

Currency strategists noted that geopolitical developments in the Middle East and fears surrounding AI were contributing to the dollar's strength. The Japanese yen, meanwhile, weakened amid rising expectations of a Bank of Japan rate hike. The US dollar strengthened against the yen by 0.7 percent to 154.55 yen, marking a reversal from last week's low point of almost seven months below 153.

Analysts are closely watching whether the Federal Reserve will raise interest rates on Wednesday in response to the surge in energy prices, which have driven diesel to record highs and contributed to an upward revision of inflation expectations in August. While the market anticipates a roughly 90 percent likelihood of a rate hike, some caution suggests the Fed might refrain from aggressive rate hikes in an election year, potentially tempering the dollar's gains.