The U.S. dollar strengthened broadly Monday as the ongoing Middle East conflict drove oil higher and investors moved into the safe-haven currency ahead of what markets see as a near-certain Federal Reserve interest-rate increase.
Warnings from leaders of major artificial-intelligence companies about potential dangers of the technology also weighed on risk sentiment, further supporting the dollar.
The U.S. dollar index, which tracks the greenback against six major peers, was up 0.3% at 99.41, after earlier touching 99.735 — its highest level since September 2.
The euro fell to a one-month low of $1.153, last down 0.2%, while the British pound slipped 0.2% to $1.3512.
Oil prices surged, unnerving investors and pushing global bond yields back toward multi-year highs. Brent crude jumped as much as 5% to $109.8 a barrel before paring gains to trade at $105.61. Recent price support has come from Houthi strikes targeting Saudi Arabia, the world's largest oil exporter, after the kingdom shut down its main pipeline bypassing the Strait of Hormuz. That pipeline runs to the Red Sea, now threatened by Iran-backed Houthi forces. Diplomatic efforts to resolve the U.S.-Israeli war with Iran appeared to stall when a meeting between Tehran and other Gulf governments was postponed, and attacks on ships in the region added to supply concerns.
"Gulf developments remain concerning, and some AI-related headlines are further weighing on equities — an environment where the dollar should remain supported," said Francesco Pesole, currency strategist at ING.
Traders are pricing in a roughly 90% chance the Fed will raise rates on Wednesday, up from about 60% a week ago, according to CME Group's FedWatch tool. The anticipated hike comes as energy-price spikes — diesel has hit record highs — have pushed underlying inflation above expectations in August.
"The U.S. dollar has strengthened modestly at the start of this week, encouraged by building expectations that the Fed will begin tightening monetary policy," said Lee Hardman, senior currency analyst at MUFG.
Still, the dollar's gains carry risks. An unchanged decision from the Fed would shock markets and cut sharply into the greenback, Scotiabank analysts led by Shaun Osborne wrote in a note. A "dovish" hike that does not signal further moves would likely also weigh on the dollar, they added.
