On Monday, the US Dollar (USD) regained strength against both the Euro (EUR) and the Japanese Yen (JPY) following renewed geopolitical tensions in the Middle East. Earlier in the day, the Euro had climbed to an intraday high of 1.1449 against the Dollar, trading around 1.1408 at the time of reporting, as initial optimism emerged from reports that mediators had proposed a 10-day pause in strikes to revive the interim US-Iran deal. Both US and Iranian officials signaled openness to diplomacy, with Iranian Foreign Ministry spokesperson Esmaeil Baghaei confirming recent exchanges with intermediaries and US Secretary of State Marco Rubio stating that Washington remained open to diplomacy if agreements were respected by both sides [1][2].
However, market sentiment shifted rapidly after Reuters reported that Yemen’s Iran-aligned Houthis had declared an immediate naval blockade against Saudi Arabia. This development reignited geopolitical risk, prompting a swift rotation back into the US Dollar and erasing earlier gains in EUR/USD and USD/JPY. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, rebounded to trade around 101.00 after hitting an intraday low of 100.65 [1][2]. Oil prices also surged to their highest level in over a month, intensifying concerns about energy-driven inflation and the potential for renewed price pressures in both the Eurozone and the US [1][2].
In terms of monetary policy, markets expect the European Central Bank (ECB) to keep its Deposit Facility Rate unchanged at 2.25% at its upcoming meeting on Thursday, though a rate hike by September is fully priced in. Meanwhile, the probability of a Federal Reserve (Fed) rate hike in September stands at around 63%, according to the CME FedWatch Tool. Several Fed officials have reiterated their commitment to bringing inflation back to the 2% target, and markets are now pricing in at least one additional rate hike this year [1][2]. Brown Brothers Harriman (BBH) analysts noted that tighter monetary policy in the Eurozone, while the economy operates below potential, is more likely to limit EUR downside than push the currency higher, as it could prompt a downward adjustment to ECB rate expectations [1].
On the Japanese side, the USD/JPY pair traded around 162.55, up 0.10% on the day. Japanese authorities, including Finance Minister Satsuki Katayama, reiterated their readiness to intervene in the foreign exchange market to counter excessive moves in the Yen. The Bank of Japan (BoJ) is expected to leave its policy rate unchanged at 1% at its next meeting, while signaling the possibility of further rate hikes in the near term. BBH analysts suggested that stronger inflation in Japan and a policy rate near the lower end of the BoJ's estimated neutral range could lead markets to anticipate further monetary tightening, potentially supporting the Yen over the medium term [2].
According to a table of percentage changes, the US Dollar gained 0.25% against both the Euro and the British Pound, and 0.11% against the Japanese Yen on the day. The Japanese Yen was strongest against the Swiss Franc [2].
CONCLUSION
Renewed Middle East tensions have driven a sharp rebound in the US Dollar, reversing earlier risk-on sentiment and impacting both the Euro and Japanese Yen. With oil prices surging and central banks signaling continued policy tightening, markets remain highly sensitive to geopolitical developments and inflation risks.