US dollar holds near 18-month high as Middle East tensions stir energy markets

The US dollar hovered near an 18-month peak on Monday as escalating conflict in the Middle East and renewed volatility in energy supplies kept global currency markets on edge.

The dollar index, which tracks the greenback against six major peers, traded at 102.14 in Asian trade. While slightly softer on the day during holiday-thinned liquidity in Asia, the currency remained near the high it set last week. Global investors turned cautious following drone and missile strikes by Yemen's Houthi group on energy infrastructure in Saudi Arabia and weekend attacks on two oil tankers.

Energy markets reacted swiftly to the elevated shipping risks. Brent crude futures slipped 1% to $103.55 a barrel after initial swings, caught between Middle East supply risks and an announcement on Sunday by US President Donald Trump regarding an energy ceasefire between Ukraine and Russia. In the region, Iran confirmed it had received a US peace proposal through intermediaries, though market analysts cautioned that a rapid diplomatic resolution remains improbable.

What is driving the dollar rally

Beyond geopolitical friction in the Gulf, currency traders are focused squarely on Wednesday's US consumer price index report. The reading represents one of the final pieces of key data before the Federal Reserve gathers for its late-October interest rate meeting.

US consumer sentiment weakened earlier this month under the weight of higher living costs driven by regional turmoil. The Fed raised borrowing costs last month for the first time since 2023 to stem price pressures. Pricing across interest rate derivatives now points to an 81% probability that the US central bank will leave rates unchanged at its upcoming review, up sharply from 51% a month ago, according to the CME FedWatch gauge.

Major currencies showed muted movement against the greenback. The Japanese yen traded at 158.16 per dollar, while the euro held near $1.121 following five consecutive weeks of declines linked to political and fiscal strain in France. The British pound sat at $1.3245, and the offshore Chinese yuan was flat at 6.6927 per dollar.

How India absorbs global headwinds

For major energy importers, the combination of triple-digit crude prices and a strong US dollar typically exerts upward pressure on imported inflation and tests exchange rate stability. Yet India enters this period of global turbulence with well-anchored domestic fundamentals and disciplined macroeconomic management.

Robust domestic revenue collections, record infrastructure capital expenditure, and strong foreign exchange reserves have allowed New Delhi and the Reserve Bank of India to shield the rupee from erratic swings seen across peer currencies. India's diversified sourcing of crude oil and active bilateral diplomacy in West Asia have kept supply lines resilient despite disruptions in the Red Sea and Arabian Peninsula corridors.

While high bond yields across Western markets continue to drive borrowing costs up worldwide, India's stable fiscal trajectory and sustained economic momentum position it to absorb external commodity shocks far more effectively than during previous global energy spikes.