Dollar firms on Middle East tensions and inflation expectations

The US dollar index advanced 0.17% on 20 July 2026, buoyed by intensifying hostilities between the United States and Iran. The escalation has driven crude oil prices higher, raising inflation expectations that could lead the Federal Reserve to adopt a tighter monetary stance. This dynamic, combined with the dollar’s traditional role as a safe-haven currency, provided support to the greenback despite mixed domestic economic data.

Military tensions have escalated significantly, with the US conducting its ninth consecutive day of airstrikes on Iranian military targets and communications networks. Iran has retaliated with drone and missile attacks on US bases in Kuwait, Jordan, Bahrain, and Iraq. The New York Times reported that the US is deploying additional F-35 and F-16 fighter jets to the region, further signalling the depth of the conflict.

Compounding the geopolitical risk, Houthi rebels announced plans to impose a maritime blockade on Saudi Arabia in retaliation for what they describe as a siege on the Yemeni capital. This threat to global shipping routes has added to the safe-haven demand for the dollar. However, crude prices have pulled back from recent highs after Iran indicated it would not abandon diplomacy, with Qatar and Pakistan proposing a 10-day cessation of strikes.

Domestic economic indicators provided a counterbalance to the geopolitical tailwinds. US June leading indicators fell by 0.2% month-on-month, missing expectations of a 0.1% decline. Additionally, strength in equity markets has reduced the liquidity demand for the dollar, limiting its gains. Swaps markets are currently pricing in only a 14% probability of a 25 basis point rate hike at the Federal Open Market Committee meeting on 28-29 July.

The dollar’s strength weighed on other major currencies. The euro weakened by 0.22%, pressured by dovish German producer price data which showed prices easing to 1.8% year-on-year, below the European Central Bank’s 2% target. The yen fell to a one-week low against the dollar, exacerbated by higher crude oil prices which are bearish for the energy-importing Japanese economy. Japanese authorities remain on high alert, with the yen trading near 160 per dollar, a level that has previously triggered intervention.

Precious metals faced headwinds from the stronger dollar and rising bond yields, despite safe-haven demand. Gold prices dipped 0.36%, undercut by the strengthening greenback and inflation expectations that could prompt central banks to tighten policy. Long holdings in gold exchange-traded funds fell to a 9.75-month low, although central bank demand remains robust, with China’s central bank increasing its gold reserves for the twentieth consecutive month.