The U.S. dollar stayed firmly supported on Wednesday as renewed fighting between the United States and Iran sent oil prices higher, rattled global bond markets and revived fears that another inflation shock could force central banks to keep interest rates higher for longer.
The market reaction is no longer just about geopolitics.
Investors are increasingly confronting a much larger question: Could another surge in energy prices push the Federal Reserve into raising interest rates again just as parts of the U.S. economy appear to be losing momentum?
That possibility is helping keep the dollar strong — and putting pressure on currencies from Japan to the Philippines.
Reuters reported that the U.S. dollar index, which tracks the greenback against a basket of major currencies, stood around 99.67 in Asian trading on September 2. The dollar’s traditional safe-haven appeal has been reinforced by higher U.S. Treasury yields and growing expectations that the Federal Reserve could raise rates at its September meeting.
Oil Jumps Again as U.S.-Iran Conflict Escalates
The latest move came after the United States launched another wave of airstrikes against Iranian targets on Tuesday, triggering retaliation from Tehran and marking one of the most serious escalations in weeks.
Associated Press and Financial Times reporting also confirmed renewed U.S. strikes and Iranian retaliation amid mounting tensions surrounding the Strait of Hormuz, one of the world’s most important energy shipping corridors.
That renewed confrontation immediately spilled into energy markets.
After surging more than $4 a barrel during Tuesday’s session, Brent crude settled at $94.65, up 4.6%, while West Texas Intermediate climbed 5.2% to $90.22.
The rally continued early Wednesday.
Brent rose another 0.92% to approximately $95.52 a barrel, while WTI gained 0.89% to about $91.02, according to Reuters.
MarketWatch similarly reported that crude had climbed to roughly six-week highs as traders priced in renewed supply risks linked to the confrontation with Iran and instability around the Strait of Hormuz.
And that matters far beyond the oil market.
Why Expensive Oil Is Suddenly a Dollar Story
Higher oil prices can filter directly into transportation, manufacturing and consumer costs.
If those increases persist, inflation could prove harder for central banks to control.
That has triggered selling across government bond markets as investors reconsider how quickly — or whether — monetary policy can become easier.
The yield on the benchmark 10-year U.S. Treasury climbed to around 4.8%, after touching its highest level since January 2025.
Japan’s 10-year government bond yield, meanwhile, reached 3% for the first time since 1996.
British and eurozone borrowing costs have also climbed sharply, according to Reuters and the Financial Times.
The logic driving markets is straightforward:
Higher oil prices can mean higher inflation.
Higher inflation can mean higher interest rates.
And higher U.S. rates and bond yields can make dollar-denominated assets more attractive.
That combination has helped turn the greenback into one of the clearest beneficiaries of the latest geopolitical shock.
Fed Rate-Hike Bets Suddenly Jump
Perhaps the biggest development for currency markets, however, is happening in Washington rather than the Middle East.
Investors have sharply increased bets that the Federal Reserve could raise interest rates at its September 15-16 meeting.
Markets were pricing roughly a 67% probability of a September Fed rate increase, according to CME Group’s FedWatch tool cited by Reuters — up from around 40% only a week earlier.
Fed Chair Kevin Warsh’s recent comments on inflation helped shift expectations, while Federal Reserve Governor Michael Barr said Tuesday that the central bank may have to increase rates if inflation fails to cool sufficiently.
The change in expectations is notable because some recent U.S. economic indicators have actually disappointed.
July job openings and the August ISM manufacturing reading came in below market forecasts.
Normally, weaker economic figures could pressure the dollar by encouraging expectations of easier monetary policy.
But geopolitical tension and expensive energy are complicating that equation.
If oil keeps climbing, the inflationary impact could outweigh weakness elsewhere in the economy.
Yen Falls Beyond 160 Despite Japan Rate-Hike Expectations
Few currencies illustrate the dollar’s strength more clearly than Japan’s yen.
The yen traded around 160.21 per dollar on Wednesday, remaining on the weaker side of the psychologically important 160 level even as markets overwhelmingly expect the Bank of Japan to raise rates this month.
That weakness is particularly striking because U.S. and Japanese authorities carried out a rare coordinated intervention at the end of July.
The action temporarily pulled the yen away from a roughly 40-year low of 163.99 per dollar, but the Japanese currency has since surrendered around half of those gains.
U.S. Treasury Secretary Scott Bessent has also urged Japan to take decisive monetary action to combat the currency’s weakness.
But with oil prices elevated and U.S. yields climbing, the pressure on the yen remains intense.
The Philippines Is Feeling It Too
The stronger dollar is also having consequences closer to home.
The Philippine peso fell to a fresh record closing low of ₱62.40 against the dollar on September 1, according to Bankers Association of the Philippines data reported by The Philippine Star.
The peso had previously closed at a record ₱62.265 on August 28.
Philippine market reports linked the latest weakness partly to expectations of higher U.S. Treasury yields, tighter Federal Reserve policy and elevated oil prices — essentially the same forces currently supporting the dollar globally.
For an oil-importing economy like the Philippines, that combination can be particularly uncomfortable.
A stronger dollar can make imported fuel and other dollar-priced commodities more expensive in peso terms, while expensive crude itself creates an additional inflation risk.
Stocks and Gold Are Also Feeling the Pressure
The turmoil has spread across asset classes.
On Tuesday, the Dow Jones Industrial Average dropped 0.8%, the S&P 500 declined 0.7%, and the Nasdaq Composite fell about 1% as investors reacted to higher yields, geopolitical uncertainty and the possibility of tighter monetary policy.
Gold — normally another destination during periods of geopolitical stress — fell sharply as rising bond yields and the strong dollar reduced its appeal. Spot gold dropped about 2.7% to $4,328.60 an ounce, according to Reuters.
It is a reminder that this market shock is behaving differently from a simple rush into every traditional safe haven.
Right now, the dollar appears to have the advantage.
What Markets Are Watching Next
The next major test may not come from Tehran or Washington’s military operations.
It could come from U.S. economic data.
The August employment report is due Friday, with economists surveyed by Reuters expecting employers to have added approximately 56,000 jobs.
Consumer inflation figures will follow before the Federal Reserve’s September 15-16 meeting.
Those numbers could determine whether markets have gone too far in pricing another rate increase — or whether the Fed really is preparing to tighten policy again.
But there is an even bigger wildcard.
If fighting around Iran and the Strait of Hormuz escalates further and crude continues climbing, central banks could face one of the most difficult combinations in monetary policy: slowing economic growth alongside renewed inflation pressure.
For now, the dollar is benefiting.
The real question is how long that can continue before expensive oil, higher borrowing costs and geopolitical instability begin inflicting deeper damage on the global economy.
And that may be the risk markets are only beginning to price in.
WWC ONE MEDIA MJE
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