The U.S. dollar climbed to a six-week high on Wednesday as investors weighed the possibility that the Federal Reserve may need to raise interest rates to fight inflation driven by the ongoing war with Iran. According to a report by Reuters, published through Yahoo Finance, the dollar index rose to 99.47, its highest level since April 7, before settling roughly flat at 99.32.
The conflict has all but closed the Strait of Hormuz, one of the world's most critical shipping lanes for oil, sending energy prices sharply higher. Brent crude futures stood at $109.20 per barrel on Wednesday, down 1.9% on the day but still roughly 50% above where prices were in late February before the war began.
President Donald Trump said the United States may need to strike Iran again, but he also suggested that Tehran is looking for a deal to end the fighting. That uncertainty has kept markets on edge, triggering a broad selloff in global bonds. The yield on the U.S. 30-year Treasury bond hit its highest point since 2007.
Traders are now pricing in more than a 50% chance of a Fed rate hike by December, according to CME FedWatch data. That marks a sharp reversal from just before the war began, when markets had been expecting two rate cuts by year's end.
Derek Halpenny, a senior currency analyst at MUFG, pointed to rising bond yields as the main force driving the dollar higher. "There is scope for yields to move further higher," he said. "While we maintain that the Fed will ultimately hike by less than many other G10 central banks, market pricing remains relatively low at this juncture — especially with the risks of a further jump in crude oil prices building."
The euro dropped to a six-week low of $1.158 before recovering to trade little changed. The British pound was roughly flat at $1.3401. The Australian dollar, which traders often treat as a gauge of global risk appetite, ticked up 0.3% after falling 0.9% the previous day.
The dollar's strength has also pushed the Japanese yen back toward the 160-per-dollar level that prompted Japanese authorities to intervene in currency markets last month. Tokyo stepped in multiple times at the end of April and in early May to slow the yen's slide, according to sources cited by Reuters, but the yen's recovery proved short-lived. The currency was last trading flat at 159.02 per dollar.
U.S. Treasury Secretary Scott Bessent added to the pressure on Japan's central bank on Tuesday, telling Reuters he was confident Bank of Japan Governor Kazuo Ueda would do "what he needs to do" if granted sufficient independence by Japan's government. The comment was widely read as Washington signaling its desire for the BOJ to raise rates further, which could help slow the yen's depreciation.
Investor attention now turns to the minutes from the Federal Reserve's most recent policy meeting, due later Wednesday, for any clues about how policymakers are thinking about inflation and the path of interest rates in the months ahead.
