Dollar firms as US-Iran tensions lift oil

The dollar gained strength on Monday, nearing a two-month high, as the US-Iran tensions continued to boost oil prices, and investors anticipated a data-heavy week for signs of inflation and central bank actions. The euro and British pound both weakened slightly against the dollar, settling near multi-month lows. The dollar index, which tracks the greenback's performance against a basket of currencies, rose marginally to 101.15, with a projected 1.7% gain for September, marking its best month since June.

Oil prices surged over 1% on Monday, with Brent crude futures briefly surpassing $106 a barrel, following US President Donald Trump's rejection of a peace agreement with Iran and the resumption of conflict over the Strait of Hormuz. The greenback's potential overcorrection in the short term could occur if energy market tensions persist and inflation pressures rise, according to Sim Moh Siong, an FX strategist at OCBC.

The bank's baseline expectation remains a moderate dollar rally heading into year-end. Market attention will shift to forthcoming US data releases, including the Personal Consumption Expenditures (PCE) Index on Wednesday and non-farm payrolls on Friday, both indicators expected to suggest continued rate hikes from the Federal Reserve.

Other upcoming data points for the week include China's Purchasing Managers' Index (PMI) on Wednesday, Japan and euro zone consumer price indices on Friday, and the Australian dollar, which fell 0.07% to US$0.7017. The Reserve Bank of Australia is anticipated to hike interest rates by 25 basis points to a near 15-year high of 4.60% on Tuesday, likely to be the final increase in the current tightening cycle.

Meanwhile, the offshore yuan weakened to 6.7235 per dollar following the three-day summit between US President Donald Trump and Chinese President Xi Jinping, which failed to produce significant breakthroughs on numerous contentious issues.