The dollar strengthened at the start of the week, remaining near a two-month high as tensions between the United States and Iran pushed oil prices higher and increased concerns about inflation. At the same time, resilient U.S. economic data and hawkish comments from Federal Reserve officials are reinforcing expectations that the central bank could maintain a tighter monetary policy stance.

Oil Prices Rise as Iran Tensions Support the Dollar

Brent crude futures rose more than 1% early Monday and traded above $106 a barrel after U.S. President Donald Trump rejected an Iranian proposal for a peace agreement that would allow the Strait of Hormuz to reopen. Brent prices have risen about 17% since the start of September, while U.S. crude futures traded around $93.47 a barrel.

The concern extends beyond the price of crude itself. A shortage of refining capacity has pushed diesel prices to record levels, significantly above crude prices, increasing the risk that higher energy costs could become embedded in goods and services prices and eventually influence wage decisions. For markets, this means the inflationary impact of the Middle East conflict could persist even if crude prices stabilize.

Rate Expectations Provide Additional Support for the Dollar

The dollar index, which measures the U.S. currency against a basket of major currencies, rose to 101.15 and is on track for a 1.7% monthly gain in September. The euro and British pound each weakened about 0.1% against the dollar, trading at $1.1379 and $1.3232, respectively.

The dollar’s strength also reflects a shift in expectations for Federal Reserve policy. Markets are currently pricing roughly a 65% probability of another rate hike at the central bank’s meeting at the end of October. Meanwhile, longer-term U.S. Treasury yields remain elevated as investors assess whether higher energy prices could make it harder for inflation to return to the Federal Reserve’s target.

Economic Data Could Shape the Next Market Move

Several important U.S. economic indicators are due this week and could influence interest-rate expectations. The PCE inflation report is scheduled for Wednesday, while employment data, including the Nonfarm Payrolls report, is due Friday. Data showing persistent inflation or continued economic strength could reinforce expectations for tighter monetary policy.

Growth indicators are also supporting the U.S. economic outlook. The Federal Reserve Bank of Atlanta’s GDPNow model is currently pointing to an annualized growth rate of 5.0% for the current quarter. The combination of strong economic activity, elevated energy prices and higher Treasury yields could continue to support the dollar even as equity markets attempt to maintain relative stability.

Investors will be watching developments between the United States and Iran, oil prices and conditions around the Strait of Hormuz, alongside U.S. inflation and employment data. Any sign of reduced geopolitical risk could lower the energy risk premium and ease inflation expectations, while further escalation could extend the period of elevated energy prices and strengthen expectations for additional Federal Reserve tightening.