Geopolitical tensions exacerbate inflation concerns, and the dollar rises to a nearly one-month high

According to the Zhitong Finance APP, the demand for safe-haven currencies has surged due to the U.S. attacks on Iran, while rising oil prices highlight inflation risks, causing the dollar to rise to its highest level in nearly a month on Monday.

The Bloomberg Dollar Spot Index rose by 0.6%, reaching its highest level since May 30. Investors are concerned that high oil prices may exacerbate inflation, leading the Federal Reserve to delay interest rate cuts. The dollar rose more than 1% against the yen, further strengthening during the London trading session following reports of Israel launching a new round of attacks on Iran's key nuclear facilities.

Lee Hardman, a senior foreign exchange strategist at Mitsubishi UFJ Financial Group, wrote in a research report: "Geopolitical uncertainty is increasing, coupled with the risk of triggering a new round of energy price shocks, providing more support for the dollar in the short term, while the Fed's reluctance to restart the rate-cutting process is also a positive factor."

The rapid escalation of the Middle East conflict has driven the dollar to rebound from last week's three-year low, recording its strongest weekly performance since late February. Signals from the options market indicate that the dollar still has room to rise in the near term—the one-month risk reversal indicator has climbed to its highest level since early April, highlighting bullish sentiment towards the dollar.

Jan von Gerich, head of foreign exchange strategy at Rabobank, stated that the dollar "has returned to its safe-haven properties," contrasting with its performance for most of this year when the dollar failed to rise in response to concerns about U.S. tariffs triggering a global economic slowdown.

Investors are closely watching whether Iran will take countermeasures against U.S. and Israeli attacks, such as disrupting shipping in the Strait of Hormuz, a major route for oil and gas transportation. Although global stock markets reacted mildly, Brent crude oil reached a five-month high on Monday.

Rising oil prices could push up inflation, making the Fed less willing to cut rates in the coming months to avoid falling into stagflation, a situation where rising prices coexist with slowing economic growth. As a result of this risk, U.S. Treasury prices fell on Monday, with the yield on the 10-year Treasury rising by 3 basis points to 4.34%.

Traders have also lowered their expectations for Fed rate cuts, with current pricing indicating that the Fed may cumulatively cut rates by 48 basis points by the end of the year, slightly down from the approximately 50 basis points expected at the end of last week.

Gregor Hirt, Chief Investment Officer of Multi-Asset at Allianz Global Investors, pointed out: "Even though the dollar initially strengthened after the attacks, long-term conflicts and inflation pressures may complicate the Fed's policy stance." He added: "In the medium term, structural concerns such as the U.S. twin deficits and weakened safe-haven credibility may suppress the dollar."