Dollar stays near 18-month peak as conflict and US inflation test markets

what happened

Reuters reports that the dollar remained close to its strongest level in 18 months on Monday. Worsening tensions in the Middle East encouraged demand for safer assets ahead of Wednesday’s US consumer inflation figures, which may alter expectations for Federal Reserve interest-rate policy.

Oil markets turned volatile after Iran-backed Houthi forces in Yemen intensified attacks on Saudi Arabia and two tankers came under assault during the weekend. Brent futures gained 2.09% to $106.80 a barrel, approaching a two-week high. The attacks outweighed Sunday’s announcement by US President Donald Trump of an energy ceasefire between Ukraine and Russia. The futures contract is still almost 45% above its pre-war level, while prices in some physical markets are twice as high.

The dollar index rose 0.16% to 102.39, just below last week’s 18-month peak. Weekly figures from the US market regulator indicate that investors’ net bullish dollar exposure reached about $36 billion in the week through October 7, versus $8.4 billion three weeks earlier, largely at the euro’s expense. CME FedWatch data put the probability of the Fed leaving rates unchanged this month at 81%, compared with 51% a month earlier.

The euro slipped 0.19% to $1.1180 after suffering a fifth consecutive weekly decline, with investors focused on France’s fiscal position ahead of the 2027 presidential election. The gap between French and safer German 10-year yields stood at 140 basis points, after approaching 160 basis points last week, its widest level since 2012. The dollar edged up to 158.57 yen, while sterling was steady at $1.323. The rupee had earlier climbed 1.1% to 95.7 per dollar after India’s central bank redirected oil companies’ dollar buying away from the spot market.

why it matters

Geopolitical risk, elevated oil prices and the approaching CPI release are reshaping expectations for the Fed while supporting the dollar and adding pressure to European assets and global bond markets.

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