Dollar Gains as Middle East Tensions Spur Safe-Haven Demand

The U.S. dollar gained ground against a basket of major currencies on Tuesday, as escalating conflict in the Middle East drove investors toward safe-haven assets. The geopolitical developments shifted market focus away from monetary policy, which had recently been the primary driver for the greenback.

By late afternoon, the U.S. Dollar Index (DXY), which measures the currency against six major peers, was up 0.2% to 101.10, according to Investing.com data.

Gulf Tensions Escalate

Demand for the dollar surged after the United Kingdom Maritime Trade Operations (UKMTO) reported attacks on three separate oil tankers in and around the Strait of Hormuz. In response, the U.S. Treasury Department revoked a key license authorizing the sale of Iranian oil products.

Citing a U.S. official, both Reuters and Axios reported the move was a direct response to the attacks, which the official blamed on Iran. The heightened risk sent oil prices spiking more than 5%. The UKMTO subsequently raised its threat level for the region to "severe."

Focus Shifts from Fed Policy

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Prior to the attacks, currency markets were primarily focused on the outlook for U.S. interest rates. The dollar had weakened late last week following a softer-than-expected June jobs report, which traders interpreted as giving the Federal Reserve room to keep rates on hold.

Investors are now looking ahead to the release of the minutes from the Fed's June meeting on Wednesday for further insight. The minutes will be the first under new Fed Chair Kevin Warsh, who has signaled a shift away from forward guidance to focus solely on inflation data.

Other Major Currencies

Other currencies moved in response to the dollar's strength and regional economic data:

• The euro (EUR) fell 0.3% against the dollar to $1.1411. Stronger-than-forecast German industrial production data was offset by a cautious economic outlook from European Central Bank official Fabio Panetta.
• The Japanese yen (JPY) remained near 40-year lows against the dollar, with the USD/JPY pair trading around 162.10. The yen also hit its lowest level against the British pound since 2007, increasing speculation that Japanese authorities may intervene in currency markets to support the yen.