Dollar stays near 18-month high as Mideast conflict, inflation data in focus

The dollar maintained its position near a 18-month peak in early Asian trade on Monday as tensions in the Middle East and upcoming US inflation data influenced investor sentiment. The conflict escalated with Yemen's Houthis intensifying strikes on Saudi Arabia and two tankers being attacked over the weekend. Oil prices experienced volatility, with Brent crude futures falling 1% to $103.55 per barrel.

The dollar index, which gauges the greenback's strength against six other currencies, remained close to its 18-month high reached last week at 102.14. Trading activity was restricted due to Japanese markets being on holiday, resulting in reduced liquidity.

Analysts from Commonwealth Bank of Australia believed the Houthis would continue targeting Saudi Arabian energy assets, which would further bolster oil prices and the US dollar. However, they noted that Iran hadn't signaled a breakthrough from a US peace proposal through intermediaries this week. The US dollar weakened against the yen by 0.14% to 158.160 yen, while the Australian and New Zealand dollars were essentially flat at $0.6988 and $0.5614, respectively.

The spotlight shifted to Wednesday's US consumer price index report, which will be released ahead of the Federal Reserve's October meeting on interest rates. Last week's data revealed a declining US consumer sentiment due to the rising living costs caused by Middle East tensions. The Federal Reserve had increased rates for the first time since 2023 to combat inflation, and markets remained watchful for any further policy adjustments.

Based on the CME FedWatch tool, there was an 81% probability of the Fed maintaining steady interest rates this month, up from 51% a month prior.

While the dollar's rally might pause in the near term, Barclays analysts suggested that severe bond market sell-offs have tightened global financial conditions. A more reassuring tone from the Fed during the October meeting could arise if the CPI reading is softer than expected. The euro gained nearly 0.1% to $1.121 after recording consecutive weekly losses, as it faced mounting concerns over France's fiscal health amid political uncertainty before the 2027 presidential election.

OCBC FX strategists stated that a significant fiscal and political narrative in France may not persist, implying limited upside for the euro. The British pound remained stable at $1.3245, and the US dollar held steady against the Chinese yuan at 6.6927 yuan in offshore trade. Bitcoin increased by 0.2% to $83,788.50, and ether climbed 0.15% to $2,540.08.