Dollar firms as US-Iran tensions lift oil, hawkish Fed bets build

The dollar inched higher to hold near a two-month high on Monday, as the US-Iran standoff continued to push up oil prices while investors looked ahead to a data-packed week for more clues on inflation and central banks' moves.

The euro and sterling were both 0.1% weaker against the dollar, last at $1.1379 and $1.3232, respectively, hovering near multi-month lows against the greenback.

The dollar index, which measures the US currency against a basket of peers, was a touch higher at 101.15 and on track for a 1.7% gain in September, its best month since June.

Oil prices climbed more than 1% on Monday with Brent crude futures last above $106 a barrel, after US President Donald Trump rejected a peace deal with Iran to resolve their conflict and reopen the Strait of Hormuz.

Energy supply risks and robust fundamentals in the US have heightened inflation concerns and prompted traders to price in a more hawkish Federal Reserve, while elevated long-end Treasury yields also supported the dollar.

"The greenback could overshoot in the near term if energy market tensions persist and inflation risks continue to build," said Sim Moh Siong, FX strategist at OCBC.

The bank's base case remains for a moderate USD rally into year-end, he added.

The market's focus is set to turn to US data releases as the week unfolds, with the PCE Index on Wednesday and non-farm payrolls on Friday both expected to be consistent with further policy tightening.

Currently, markets are seeing a 65% chance of a rate hike from the Fed when the central bank meets next at the end of October, according to CME Group's FedWatch tool.

Other data for the week include China PMIs on Wednesday ahead of the week-long National Day holidays and Japan and euro zone CPIs on Friday.

The yen was last down 0.3% at 157.7 per dollar. It gained on Friday after Japan's Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent held a call on Friday and reaffirmed that yen undervaluation is a matter of concern and that the two nations intend to strengthen cooperation.

The Australian dollar fetched $0.7017, down 0.07%, and the kiwi traded flat at $0.5661.

The Reserve Bank of Australia is expected to raise interest rates by 25 basis points to a near 15-year high of 4.60% on Tuesday, expected to be the final rate increase in the tightening cycle.

Elsewhere, offshore yuan weakened to 6.7235 per dollar after Trump and Chinese President Xi Jinping's three-day summit did not yield any big public breakthroughs on a host of contentious issues.
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