The U.S. dollar remained near an 18-month high in early Asian trading on Monday, October 12, as escalating tensions in the Middle East reinforced demand for the currency and investors awaited fresh U.S. inflation data. The dollar’s strength reflects a combination of geopolitical uncertainty, concerns about rising energy prices and expectations that the Federal Reserve may need to keep monetary policy restrictive for longer.

Middle East Tensions Support Demand for the Dollar

The Dollar Index, which measures the greenback against a basket of six major currencies, slipped slightly to 102.14 but remained close to its recent peak. Trading conditions were relatively subdued, partly because of market holidays in Japan. Nevertheless, developments in the Middle East continued to shape currency-market sentiment.

Iran-backed Houthi attacks on Saudi energy infrastructure, alongside weekend attacks on tankers, raised concerns about the potential for further disruption to regional energy supplies and international shipping. Saudi Arabia’s strategic role in global oil markets means that any prolonged disruption could have consequences well beyond the region. Investors have responded to the uncertainty by maintaining demand for the dollar, which often benefits when geopolitical risks increase.

Although U.S. President Donald Trump announced a proposed energy ceasefire between Russia and Ukraine over the weekend, oil markets remained volatile. The possibility of additional disruptions in the Middle East continues to complicate the outlook for global energy prices and inflation.

Inflation Data Could Shape the Federal Reserve’s Next Move

The next major catalyst for currency markets is Wednesday’s U.S. Consumer Price Index (CPI) report. The figures will offer investors an updated assessment of inflationary pressures ahead of the Federal Reserve’s October policy meeting.

Energy prices are central to the outlook. If the Middle East conflict pushes oil prices higher for an extended period, the resulting increase in fuel, transportation and production costs could slow the decline in inflation. That would complicate the Fed’s efforts to balance price stability with economic growth.

Traders broadly expect the central bank to maintain its current interest rates at the October meeting, but stronger-than-expected inflation could reinforce expectations that borrowing costs will remain elevated for longer. Higher U.S. interest rates relative to those in other economies can support the dollar by making dollar-denominated assets more attractive. Conversely, softer inflation data could reduce pressure on the Fed to maintain a restrictive stance and weaken one of the dollar’s key sources of support.

Euro and Other Major Currencies Face Competing Pressures

The euro, British pound and other major currencies showed limited movement during early trading. The euro remained under pressure from concerns about France’s fiscal position ahead of its 2027 presidential election, adding a regional challenge to the broader strength of the dollar.

The currency outlook also reflects diverging economic conditions and government bond yields. Rising borrowing costs and fiscal uncertainty in parts of Europe have weighed on investor confidence, while expectations surrounding U.S. monetary policy continue to influence demand for the greenback. A sustained shift in interest-rate expectations or a reduction in geopolitical tensions could alter these dynamics.

Markets will now focus on Wednesday’s inflation figures, developments involving Saudi Arabia and the wider Middle East, and any signals from Federal Reserve officials. The direction of oil prices will be particularly important: further increases could intensify inflation concerns and support the dollar, while easing tensions and a softer CPI reading could provide relief to other major currencies. Until those signals become clearer, currency markets are likely to remain sensitive to both geopolitical headlines and incoming economic data.