Dollar firms as US-Iran tensions lift oil, hawkish Fed bets build

The dollar edged up on Monday and stayed close to its highest level in two months, according to Business Recorder, as the standoff between the US and Iran kept oil prices elevated. Brent crude rose more than 1% to trade above $106 a barrel after President Donald Trump turned down a peace proposal aimed at ending the conflict and reopening the Strait of Hormuz. The dollar index stood at 101.15 and was heading for a 1.7% gain in September, its strongest month since June.

Energy supply risks and strong US economic data have raised inflation worries, leading traders to bet on a tighter Federal Reserve. Markets put a 65% chance on a Fed rate hike at its October meeting based on CME Group's FedWatch tool, while higher long-dated Treasury yields lent support to the currency. OCBC strategist Sim Moh Siong said the greenback may overshoot in coming weeks if energy tensions persist, though the bank still expects a moderate rally into year-end.

Traders will also watch US PCE inflation figures due Wednesday and payrolls data due Friday. The euro and sterling slipped 0.1% to $1.1379 and $1.3232, while the yen was quoted at 157.7 per dollar. The Reserve Bank of Australia is widely tipped to add 25 basis points on Tuesday, lifting its rate to 4.60%, probably the final hike of the cycle.