FOREX-Dollar gains as oil, rising bond yields stoke inflation fears

The dollar strengthened on Tuesday as renewed U.S.-Iran hostilities sent oil prices higher, fuelling inflation worries and sparking a global bond selloff. The U.S. launched new air strikes on Iranian targets on Tuesday, pushing oil prices up over 4%.

The ‌dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.27% to 99.68, with the euro down 0.23% at $1.1589. The 10-year Japanese government bond yield touched 3% for the first time in 30 years, while the yield on 10-year Treasury notes hit its highest since January 2025.

Higher yields drive investors to buy ‌safe-haven currencies like the U.S. dollar while undermining the case for riskier assets like equities. "A rout in global bond markets is intensifying and the dollar is climbing as ‌an outbreak in hostilities between the U.S. and Iran revives inflation risks, raises the likelihood of interest rate hikes in the months ahead, and makes safe havens more appealing," said Karl Schamotta, chief market strategist at Corpay.

Fed funds futures traders are now pricing in 68% odds of a September rate hike, up from 35% before Federal Reserve Chairman Kevin Warsh's hawkish speech on monetary policy at the Jackson Hole symposium on Friday. He ⁠said the ​Fed would "have work to do" if inflation ⁠failed to cool, his strongest hint yet that further rate hikes could be needed to contain price pressures.

August's jobs and consumer price inflation data, both due before the Fed's September 15 to 16 meeting, may ⁠be key to whether the U.S. central bank hikes next month. This Friday's jobs report is expected to show that employers added 56,000 jobs last month, according to the median estimate of economists polled ​by Reuters.

Fed Governor Michael Barr said on Tuesday that if inflation does not cool quickly, it will be time for the U.S. central bank to increase ⁠interest rates. U.S. Treasury Secretary Scott Bessent, meanwhile, said on Tuesday that U.S. bond yields are showing that inflation expectations are "flat to down" and reflect accelerating U.S. growth.

Sterling weakened 0.26% to $1.3511. YEN WEAKENS

The Japanese yen fell 0.3% to 160.19 ⁠per ​dollar. The Japanese currency was supported on Monday after Bessent said he believed Japan's government and central bank would take action that leads to a stronger yen.

Bessent urged Bank of Japan Governor Kazuo Ueda to use monetary policy to anchor inflation expectations and avoid excessive yen volatility, the Treasury Department said on Tuesday. For now, however, the wide ⁠gap in rates between the U.S. and Japan favors the dollar.

"Investors remain focused on Japan's still-unfavorable rate differential with the United States and doubts over how aggressively the Bank ⁠of Japan will tighten policy," said Joel Kruger, ⁠market strategist at LMAX Group in London. A rare joint intervention from the U.S. and Japan at the end of July provided short-lived relief for the fragile yen, yanking it away from the 40-year lows of 163.99, but the currency has since surrendered around ‌half of the gains ‌from the joint action.