Dollar firms as US-Iran tensions lift oil, hawkish Fed bets build

The US dollar gained ground on Monday, near a two-month peak, as tensions between the United States and Iran heighten oil prices, and traders anticipate a data-heavy week for more insights into inflation and central bank actions. The euro and British pound both slipped 0.1% against the dollar, reaching $1.1379 and $1.3232, respectively, nearing multi-month lows.

The dollar index, which tracks the US currency's performance against a basket of peers, marginally rose to 101.15, marking its best September performance since June. Oil prices surged more than 1% on Monday, with Brent crude futures edging above $106 a barrel, following President Donald Trump's rejection of a peace deal with Iran to resolve their conflict and reopen the Strait of Hormuz.

Rising energy supply uncertainties, robust US fundamentals, and heightened inflation concerns have fueled inflation expectations and driven traders towards a more hawkish Federal Reserve. Andrew Sim Moh Siong, FX strategist at OCBC, noted that the dollar could experience an overshoot in the short term if energy market tensions persist, and inflation risks escalate.

The market's attention is expected to shift towards US data releases during the week, with the Personal Consumption Expenditures (PCE) Index on Wednesday and non-farm payrolls on Friday anticipated to support additional policy tightening. Currently, there is a 65% probability of a Federal Reserve rate hike by the end of October, according to CME Group's FedWatch tool.

Other economic indicators for the week encompass China's Purchasing Managers' Index (PMI) on Wednesday, Japan and the euro zone's consumer price indices on Friday, and the Reserve Bank of Australia potentially raising interest rates to a 15-year high of 4.60% on Tuesday, likely to be the last increase in the tightening cycle. Meanwhile, the Japanese yen weakened by 0.3% to 157.7 per dollar, gaining momentum after Japanese Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent discussed the undervaluation of the yen and their commitment to enhance cooperation.

The Australian dollar fell 0.07% to $0.7017, and the New Zealand dollar remained steady at $0.5661. The People's Bank of China saw its offshore yuan depreciate to 6.7235 per dollar following the three-day summit between US President Trump and Chinese President Xi Jinping, which did not produce significant breakthroughs on contentious issues.