FOREX-Dollar hovers near 18-month high as Gulf unrest, US inflation keep investors on edge

The dollar held near an 18-month high on Monday, supported by safe-haven demand as an escalating Middle East conflict kept investors cautious ahead of key US inflation data later this week. Oil prices were volatile after Yemen's Iran-backed Houthis stepped up strikes on Saudi Arabia, ‌and two tankers were attacked over the weekend.

Brent crude futures rose 2.09% to $106.80 a barrel, nearing a two-week high, as the attacks overshadowed Sunday's announcement from US President Donald Trump about an energy ceasefire between Ukraine and Russia. The futures price is still nearly 45% above where it was before the US-Israeli war with Iran started. The dollar index, which tracks the US currency against six others, was ‌up 0.16% at 102.39, just below last week's 18-month high.

Weekly data from the US markets regulator shows investors have been adding to their bullish positions on the dollar, which rose ‌to around $36 billion in the week to October 7 from $8.4 billion three weeks ago, largely at the expense of the euro. "Markets got off to a relatively encouraging start to the week, but sentiment has since deteriorated as renewed geopolitical uncertainty and rising oil prices weigh on risk appetite, prompting a fresh round of US dollar demand," said Joel Kruger, a market strategist at LMAX Group in London.

SPOTLIGHT MOVES TO US INFLATION DATA Wednesday's US consumer inflation report, ⁠one of ​the last major economic releases before the Federal Reserve's ⁠policy meeting this month, could be critical in determining the near-term direction of the dollar.

Data last week showed US consumer sentiment deteriorated further in early October, as the rising cost of living because of the Middle East conflict soured ⁠households' views of the economy. The Fed raised rates last month for the first time since 2023 to rein in inflation, with markets keeping a close watch on economic data to gauge whether policymakers may move ​again. Traders are pricing in an 81% chance of the Fed standing pat this month, up from 51% a month earlier, the CME FedWatch tool showed.

"The real focus is ⁠on the CPI number this week, it is likely to be running hot," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. He added that a rate hike before an election is so uncommon that "the ⁠bar ​is kind of high" for the Fed to act. Sharp selloffs in bond markets in the past few weeks worried investors as borrowing costs across the globe rose to multi-decade highs on concern over inflation, energy prices and ballooning government debt.

The euro fell 0.19% to $1.1180, after clocking a fifth straight week of losses last week, driven by investor angst around France's fiscal health ⁠before the 2027 presidential election. The spread between French 10-year yields and safer German yields traded at 140 basis points. Last week it neared 160 bps, the most since 2012. "It is ⁠still too early to tell whether higher ⁠borrowing costs will be sufficient to impose greater fiscal discipline on the French government," said OCBC FX strategists.

Against the yen, the US dollar was a touch higher on the day at 158.57 yen in holiday-thinned trading in Japan, while the pound held steady at $1.323.