Dollar holds 18-month high as Gulf tension, US inflation keep investors on edge

The U.S. dollar reached an 18-month high on Monday, bolstered by safe-haven demand amid escalating conflicts in the Middle East and investors' cautious outlook ahead of crucial U.S. inflation data. The dollar index climbed to 102.58, the highest level since April 2025. Oil prices fluctuated as Yemen's Iran-backed Houthis intensified attacks on Saudi Arabia, with two tankers targeted over the weekend, driving Brent crude futures up 2.3% to $107.17 a barrel.

This volatility overshadowed a statement by U.S. President Donald Trump regarding an energy ceasefire between Ukraine and Russia, which appeared to be compromised.

Cleveland Fed President Beth Hammack emphasized that the Federal Reserve should swiftly adopt a restrictive monetary policy to curb inflation. Inflation remains a major concern, with the euro weakening to $1.1156, a 17-month low, amid investor apprehension over France's fiscal situation before the 2027 presidential election. The spread between French 10-year yields and German yields widened to 140 basis points, reflecting France's weak standing.

Despite this, traders are increasingly bullish on the dollar, accounting for about $36 billion of bullish positions, up from $8.4 billion three weeks ago.

However, analysts caution that this recent risk aversion might not result in sustained dollar strength due to moderating inflation pressures and the Federal Reserve's anticipated rate hikes already priced into the market. US consumer sentiment weakened further in early October, influenced by rising living costs fueled by the Middle East conflict.

The Federal Reserve's recent rate hike, the first since 2023, aimed to rein in inflation. Traders now anticipate a 78% likelihood of the Fed remaining unchanged this month, compared to 51% a month earlier. The upcoming U.S. consumer inflation report is pivotal in determining the dollar's near-term trajectory.