Dollar firms as US-Iran tensions lift oil

The US dollar gained ground on Monday as tensions between the United States and Iran rose, prompting a surge in oil prices. The euro and British pound both weakened slightly against the dollar, closing near multi-month lows. The dollar index, which tracks the greenback against a basket of currencies, inched up to 101.15, marking a 1.7% increase for the month, the best performance since June.

Oil prices surged more than 1% to surpass $106 a barrel, driven by US President Donald Trump's rejection of a peace deal with Iran and concerns over energy supply. Traders are pricing in a more hawkish Federal Reserve, with elevated long-term Treasury yields adding to the dollar's appeal. FX strategist Sim Moh Siong at OCBC suggested the greenback could overreact in the short term if energy market tensions linger and inflation fears persist.

As the week progresses, traders will be watching for key US economic indicators, including the Personal Consumption Expenditures (PCE) Index on Wednesday and non-farm payrolls on Friday, both of which are expected to support further interest rate hikes. Meanwhile, markets are pricing a 65% chance of a Federal Reserve rate increase at the end of October, according to the CME Group's FedWatch tool.

Other data points for the week include China's Purchasing Managers' Index (PMI) on Wednesday, Japan and eurozone consumer price data on Friday, and the Reserve Bank of Australia's anticipated interest rate hike to a 15-year high of 4.60% on Tuesday. The Australian dollar slipped slightly to $0.7017, while the New Zealand dollar held steady at $0.5661.

Despite the lack of significant breakthroughs in negotiations between Chinese President Xi Jinping and US President Trump, the offshore yuan weakened to 6.7235 per dollar.