Dollar hits 2-month high on Middle East tensions
Higher oil prices add to inflation fears and increase Fed hike bets
Yen enters intervention zone, pound weakens ahead of key data
Wall Street pulls back, gold falls below key support zone
US-Iran tensions dash Hormuz reopening hopes
The US dollar extended its gains on Friday, closing its strongest week in two months, as fresh Middle East tensions dashed hopes of a potential reopening of the Strait of Hormuz and sent oil prices rallying around 4%. Both the US dollar and oil entered the new week on the front foot.
Rhetoric between US and Iranian officials suggested that huge differences remain despite several rounds of talks, peace proposals, and a ceasefire that still holds. Iran said that there is “no trust” in the US and that they would sit at the negotiating table only if the Americans are serious, while US President Trump warned that he is running out of patience, adding that he agreed with Chinese President Xi that Iran cannot be allowed to have nuclear weapons.
The situation escalated into fresh hostilities as well. A drone struck a nuclear plant in the United Arab Emirates, while Saudi Arabia intercepted another three.
Yields surge, Fed rate hike bets increase
Combined with the hotter-than-expected US inflation data last week, the fresh tensions sent Treasury yields skyrocketing, with the 10-year rate climbing to its highest since February 2025. Investors were also prompted to add to their rate hike bets. According to Fed fund futures, they are more-than-fully pricing in a 25bps rate hike by the Fed in March, while there is a strong 90% chance of it being delivered in January. The probability of a rate increase this year stands at around 70%.
Having all this in mind, it seems that the risks surrounding the US dollar remain to the upside. Elevated oil prices for longer are likely to result in even higher inflation rates, thereby bringing the timing of a potential Fed rate hike closer. Even if oil prices stabilize, it will take time for inflation to subside, as annual rates compare prices to a year ago, when they were much lower than now. Should incoming data confirm that notion, Fed officials may feel the urgency to raise rates sooner.
Yen flirts with intervention
The Japanese yen is losing ground for the sixth straight day against the US dollar, despite recent intervention episodes and strong commitment by US and Japanese authorities to tame speculative moves in the FX market
. Dollar/yen entered again the 158.00-160.00 zone, where Finance Minister Katayama becomes more vocal about signaling readiness to act if deemed necessary. Thus, the risk of another intervention episode remains high, but for any action to have a meaningful effect, the BoJ would have to proceed with a series of rate hikes. According to Japanese Overnight Index Swaps (OIS), investors see a 68% probability of a quarter point hike at the June BoJ decision, while another one is nearly fully priced in by December. Those odds could go higher if the GDP data tonight come in strong, and core CPI reveals sticky Japanese inflation.
Pound feels the heat of politics, key data awaited
The British pound also suffered losses, but not only due to a stronger dollar. Political uncertainty in the UK added pressure on the currency as calls for Prime Miniter Starmer to step down have become louder.
Speculation is now growing that Starmer’s successor could prove more willing to loosen fiscal policy, evident by the surge in UK gilt yields. UK data this week include the employment report for March on Tuesday, the CPI data on Wednesday, and retail sales on Friday. Even if the numbers add to the idea that the Bank of England may need to raise interest rates in the coming months, it is doubtful whether they could stop the pound’s bleeding. After all, the currency has been suffering amid expectations that the BoE may need to raise interest rates by another 66bps by the end of 2026.
Stocks pull back amid inflation fears, gold slides
On Wall Street, all three main indices finished Friday’s session in the red, with the tech-heavy Nasdaq losing the most ground, while stock futures are pointing to a lower open today. It seems that inflation concerns have eventually outweighed optimism about a strong earnings season, with the AI euphoria yet to face its biggest test this season. This would be earnings by the industry’s golden child Nvidia on Wednesday after the closing bell.
Gold dropped below the key support (now turned into resistance) of $4,640, to test and pause near the $4,510 zone. That said, heightening inflation fears, higher yields and a stronger dollar, are unlikely to allow that barrier to hold for long. A break lower could pave the way towards the $4,345 zone, which currently coincides with the 200-day exponential moving average (EMA).