Dollar retreats from weekly highs as oil surges on Middle East tensions
The dollar index falls 0.08% to 101.10 while the yen strengthens against the greenback. Rising crude prices and shifting Federal Reserve rate probabilities dominate market sentiment.
The US dollar retreated from a one-week high on July 22, 2026, ending a four-day winning streak as the dollar index dropped 0.08% to 101.10. The decline coincided with a slight recovery in the Japanese yen, which strengthened 0.07% to 163.04 against the greenback. The yen’s move came after touching 163.23 on Tuesday, its weakest level since December 1986, as traders assessed the likelihood of intervention by Japanese authorities and potential rate hikes by the Bank of Japan.
Market movements were heavily influenced by rising oil prices stemming from escalating tensions in the US-Iran conflict. Crude oil prices touched their highest levels in nearly six weeks, with US crude rising 3.28% to $87.11 a barrel and Brent crude up 3.66% to $94.34 per barrel. The surge was driven by concerns over supply disruptions, including four additional tankers changing course in the Red Sea on Wednesday after Iran-aligned Houthis threatened the southern route.
The geopolitical instability has reignited inflation fears, altering expectations for US monetary policy. According to CME FedWatch data, market expectations for a Federal Reserve rate hike at the July meeting have risen to 26.2%, up from 10.7% a week ago. This shift contrasts with earlier optimism that a durable peace deal could lower fuel costs and cool inflation, a narrative that had previously dented rate hike expectations.
In Japan, the yen’s recovery was bolstered by comments from Finance Minister Satsuki Katayama, who indicated authorities would take decisive action to curb excessive currency weakness if necessary. The Bank of Japan is reportedly on alert for upside inflation risks that could lead to faster interest rate hikes than currently projected. However, the currency remains under pressure due to the administration of Prime Minister Sanae Takaichi, which faces scrutiny over potential efforts to delay rate hikes.
Elsewhere in global markets, the British pound strengthened 0.5% to $1.3375, halting a four-session decline. British inflation cooled more than expected last month, partly due to a brief de-escalation in the Iran conflict that lowered fuel prices. UK Prime Minister Andy Burnham confirmed he is making no unfunded promises to change the tax-free personal allowance, with decisions deferred to the next fiscal update.
