The U.S. dollar firmed on Tuesday, touching its highest point in more than a week as investors sought refuge in the greenback and as U.S. Treasury yields climbed. Elevated market risk stemming from renewed fighting in the Middle East and a rebound in oil prices helped underpin demand for the dollar, while several Asian currencies came under renewed pressure.
At 16:02 ET (20:02 GMT), the U.S. dollar index - which tracks the greenback against a basket of six major currencies - was quoted at 101.17, up 0.2% and at its strongest level since July 13.
Inflation concerns and yields
Economic data released last week had suggested a moderation in U.S. inflation pressures, with softening readings for the headline consumer price index and the producer price index. Additional indicators showed a monthly decline in gasoline station retail sales, while the University of Michigan's July survey reported consumer sentiment at its highest since February and lower one-year inflation expectations.
Those data pointed to a potential easing of immediate rate-hike pressure on the Federal Reserve. Yet the June slowdown in headline price measures was materially influenced by a prior fall in oil prices following a temporary de-escalation between the U.S. and Iran. Since then, hostilities have resumed, and oil benchmarks have rallied: crude benchmarks had already gained nearly 4% since Monday after registering double-digit percentage increases the week before.
The pick-up in oil has brought inflationary risks back into focus and coincided with higher Treasury yields, a combination that has supported the dollar's advance. Several Federal Reserve speakers last week cautioned that the fight against inflation remains ongoing. Among them, remarks to Congress referenced chair Kevin Warsh, and Dallas Fed President Lorie Logan expressed a call for "modestly higher" interest rates.
Middle East tensions and direct statements
Military action in the region has escalated: the U.S. maintained a bombardment campaign against Iran for ten consecutive days, and Iran responded with attacks including the targeting of a commercial tanker in the Strait of Hormuz and strikes on U.S. military bases in the region. Those developments have been cited by market participants as a driver of safe-haven flows and of the rise in oil prices.
At a White House briefing on Tuesday, U.S. Secretary of War Pete Hegseth told reporters in the Oval Office: "Iran’s been given every opportunity to negotiate, to show that they’re reasonable on the Strait of Hormuz - but if they’re going to shoot at commercial shipping, then we’re going to hit them...ten times harder. Every night, we’re degrading them further and further."
Also at that event, President Donald Trump said Iran "desperately" wanted to meet, but added that "until they’re ready to meet in a meaningful way, we have no interest." He reiterated that Iran could not possess a nuclear weapon, saying "any site where they’re even thinking about nuclear - we’ll be hitting it very, very powerfully."
Currency moves beyond the dollar
The Japanese yen weakened further, trading as low as 163.19 per dollar, marking its weakest level against the greenback in about four decades. The yen has remained above the 160 per dollar threshold for over a month, a level that previously prompted significant intervention efforts from Tokyo.
The euro was slightly softer, down roughly 0.1% to $1.1401, as it traded in a narrow band ahead of the European Central Bank's policy decision. Markets expect the ECB to hold key interest rates steady at its upcoming meeting, but the rebound in energy-driven inflation risks is likely to keep ECB President Christine Lagarde from signaling any imminent easing.
Sterling fell about 0.4% to $1.3379 as benchmark British gilt yields rose for a second straight day following the appointment of Andy Burnham as the United Kingdom's new prime minister. Burnham, the seventh new prime minister in a decade, on Monday pledged to follow the fiscal framework put in place by his predecessor Keir Starmer and is in the process of forming a cabinet. His naming of John Healey as finance minister coincided with a rally in London-listed defense stocks.
Thierry Wizman, global FX and rates strategist at Macquarie, noted that the decline in sterling and the rise in gilt yields pointed to "ongoing concern about whether the new government of Andy Burnham will stick to policies that allow the UK to have fiscal discipline and debt sustainability." Wizman summarized the fiscal rules Burnham has committed to follow, including covering the non-investment portion of the budget with tax revenues within three years and ensuring public sector net financial liabilities fall as a share of GDP on the same timetable. He added that if Burnham were to abandon those pledges and raise taxes rather than reduce expenditures to meet the three-year objectives, the pound could weaken.
Market positioning and policy outlook
Market participants have reacted to the confluence of higher energy prices, geopolitical risk and rising Treasury yields by favoring the dollar. The yen's multi-decade trough and sustained pressure on the pound and gilts reflect a mix of currency-specific and political factors in addition to broader risk-off tendencies. With crude benchmarks up significantly in recent sessions and ECB officials likely to display caution on easing, investors are closely watching central-bank signals alongside geopolitical developments.
Looking ahead, attention remains on prospective policy commentary from central banks and on the path of oil prices amid the regional conflict. These elements, together with shifts in Treasury yields, will influence near-term currency dynamics.
Contributors to reporting included Roushni Nair, Pranav Kashyap, and Jaiveer Shekhawat.