Dollar Strengthens as Oil Prices Rise Amid US-Iran Tension Concerns

Key summary

The US dollar gained ground against major currencies on Friday (Oct 23) in New York forex markets, while crude oil prices climbed for a second day driven by fears of potential war between the US and Iran. The prospect of higher oil prices fueling inflation has led markets to anticipate that the Federal Reserve might raise interest rates. The Dollar Index rose 0.2% to 101.811 against a basket of six currencies. The dollar strengthened to 156.87 yen from 156.78 yen on Thursday and reached 0.8252 Swiss francs from 0.8205. Conversely, the Canadian dollar appreciated against the US dollar, with the rate moving to 1.4004 CAD from 1.4008. The euro weakened to 1.1193 dollars from 1.1220, and the British pound fell to 1.3371 dollars from 1.3400. Oil prices surged sharply on Friday following Thursday's gains, influenced by escalating tensions in the Middle East, including Houthi attacks on Saudi Arabia and reports of potential US military action against Iran. The conflict between the two nations is expected to enter its ninth month next week; while the US has paused military strikes on Iran and Iran has not attacked US bases in neighboring countries, leaders continue to exchange hardline statements. The Islamic Revolutionary Guard Corps (IRGC) stated Iran possesses the capacity to defend itself from all forms of attack and will reveal high-complexity weapons to counter US attacks, which Iran calls the 'Father of All Bombs'. A New York Times report on Thursday indicated that the US and Israel planned a joint military operation to target Iranian nuclear facilities, energy infrastructure, missile capabilities, and drones after the US midterm elections in November. Following this news, concerns about prolonged conflict and its impact on oil exports from Arab nations increased. The risk of inflation resurging due to oil prices is a key market focus, with economists suggesting major central banks may be forced to raise rates. Donald Trump, US President, posted on Truth Social that Iran is fabricating stories to push up oil prices before the US election. In an interview with Financial Times, US Ambassador to the UN Mike Waltz predicted the war could last another year but noted the Iranian government might return to negotiations sooner. Before traveling to Florida on Friday, Trump reiterated that the US can end the war quickly or allow Iran to weaken under sanctions. Elsewhere in the Middle East, after Houthi attacks on Saudi airports and energy infrastructure, Aramco ordered employees to evacuate its headquarters in Dhahran, while Houthis claimed to have attacked a Saudi military headquarters in Riyadh. The Federal Reserve is scheduled to announce interest rate policy next week; on Thursday, markets priced a 7.20% chance of a rate hike. However, CME Group's FedWatch tool shows investors now assess a 9.40% probability of a 0.25% hike at the Oct 27-28 meeting, with a 90.60% probability of rates staying unchanged. The report is by Kalayanee Chivapanich.