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The US Dollar Strengthens as Renewed U.S.-Iran Hostilities Drive Oil Prices Higher

The US dollar strengthened as renewed hostilities between the United States and Iran pushed oil prices up over 2%. This energy shock fueled inflation worries and sparked a global bond selloff, making safe havens more appealing to investors. The greenback benefited from higher oil prices because the U.S. economy is less exposed to energy shocks than many other major economies. Federal Reserve Chairman Kevin Warsh adopted a more hawkish tone during his debut speech at the Jackson Hole symposium. Warsh said the Fed would have work to do if inflation failed to cool, suggesting that further rate hikes could be needed to contain price pressures. Consequently, markets are now pricing in a 68% chance of a September rate hike, up from 35% before his comments. Fed Governor Michael Barr also noted that if inflation does not cool quickly, it will be time to increase interest rates. Meanwhile, the euro and yen have faced pressure. The euro declined as traders assessed diverging monetary policy paths, with the European Central Bank expected to be near the end of its tightening cycle. In contrast, the Federal Reserve is facing a risk of needing to tighten policy in 2027. The Japanese yen was supported by comments from Bank of Japan Governor Kazuo Ueda, who indicated that consecutive rate hikes could be a possibility.

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