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The U.S. dollar gave up early gains on Monday as investors weighed escalating conflict in the Middle East against shifting expectations for Federal Reserve policy, while the Japanese yen weakened after a Reuters report said Japan has no immediate plans to alter state pension fund asset allocations.
The greenback initially climbed alongside rising oil prices following renewed military exchanges between the United States and Iran over the weekend. Tehran launched missile and drone attacks targeting U.S. facilities across the Gulf and claimed it had once again closed the Strait of Hormuz, a key global oil shipping route. The renewed tensions pushed Brent crude futures about 3% higher to around $78.50 per barrel.
Despite the geopolitical risks, the U.S. Dollar Index erased earlier gains and was last down 0.2% at 100.83. The euro rose 0.15% to $1.1433, while the British pound traded near $1.339. The Australian dollar slipped 0.1% to $0.694.
Analysts noted that the dollar may not see the same safe-haven boost as in previous regional conflicts because markets have already priced in stronger Federal Reserve expectations. According to Capital Economics, the greenback has appreciated significantly in recent months, limiting its upside even if tensions continue to escalate.
Investors are also focused on key U.S. economic events this week, including consumer price index (CPI) data on Tuesday, producer price index (PPI) figures on Wednesday, and testimony from Federal Reserve Chair Kevin Warsh before Congress. CME FedWatch data indicates markets now see roughly a 50% chance of two or more Fed rate hikes by December.
Meanwhile, the Japanese yen weakened after Reuters reported that Tokyo does not intend to immediately revise the investment strategy of the Government Pension Investment Fund (GPIF). The U.S. dollar rose 0.2% to 162.05 yen, keeping the currency close to multi-decade lows and reviving speculation about possible intervention by Japanese authorities.
Market analysts said intervention alone is unlikely to reverse the yen's weakness unless energy prices decline and expectations for additional Federal Reserve rate hikes begin to ease.
