The US dollar traded in volatile fashion on Monday after surrendering its early gains, as investors focused on renewed military clashes in the Gulf region. Meanwhile, the Japanese yen weakened following a report indicating that Japan has no immediate plans to alter the asset allocation of its government pension funds.

The dollar initially strengthened alongside higher oil prices before losing momentum later in the session. The euro rose 0.15% to $1.1433, sterling was little changed at $1.339, while the Australian dollar slipped 0.1% to $0.694.

Renewed Gulf tensions lift oil prices

The weekend saw an intense exchange of missile and drone attacks between the United States and Iran. Tehran targeted US facilities in several Gulf countries on Sunday and once again announced the closure of the Strait of Hormuz, one of the world's most important oil shipping routes.

The developments pushed oil prices higher, with Brent crude rising about 3% to $78.50 a barrel.

In currency markets, the US dollar index, which measures the greenback against a basket of six major currencies, climbed as much as 0.3% during the session before reversing course to trade down 0.2% at 100.83.

"The dollar was the biggest beneficiary of the previous conflict, but this time it is starting from a much stronger level, and markets have already repriced their expectations for Federal Reserve policy," said Thomas Mathews, Head of Markets for Asia-Pacific at Capital Economics.

"So it is not clear that the dollar will enjoy the same gains if the situation continues to deteriorate, and that already appears to be reflected in today's price action," he added.

Markets increase bets on US rate hikes

Federal funds futures showed that markets are pricing roughly a 50% probability that the Federal Reserve will raise interest rates two or more times by its December meeting, up slightly from Friday, according to CME Group's FedWatch tool.

This week's focus will be on:

• US Consumer Price Index (CPI) data due on Tuesday.

• US Producer Price Index (PPI) data scheduled for Wednesday.

• Testimony by Federal Reserve Chair Kevin Warsh before both the House of Representatives and the Senate, which could provide fresh signals on the future direction of monetary policy.

Yen weakens again

The Japanese yen declined against the US dollar after a report indicated that the Japanese government has no immediate plans to revise the asset allocation of government pension funds.

The dollar rose 0.2% to ¥162.05, reviving concerns that Japanese authorities could intervene in the foreign exchange market as the yen continues to trade near its weakest level in almost 40 years.

The yen and Japanese government bonds had rallied on Friday after Finance Minister Satsuki Katayama said the government would explore ways to encourage pension funds, including the Government Pension Investment Fund (GPIF), to increase investments in domestic financial assets.

However, two government sources told Reuters that the administration is only seeking to encourage investment within the current asset allocation framework, with no immediate plans to revise the fund's medium-term allocation targets.

Chris Turner, Global Head of Markets at ING, said the possibility of Japanese intervention in the currency market remains on the table this week, but noted that "intervention alone cannot reverse the dollar's current upward trend."

He added that reversing the trend would require lower energy prices as well as greater confidence that the Federal Reserve no longer needs to continue raising interest rates.

Gold prices fell nearly 2% in European trading on Monday at the start of the week, extending losses for a second consecutive session under pressure from a stronger US dollar and rising oil prices, as the United States and Iran exchanged military strikes and fears of a closure of the Strait of Hormuz intensified.

The renewed surge in oil prices revived concerns over inflationary pressures facing Federal Reserve policymakers and strengthened expectations that US interest rates could be raised at least once this year.

The Price

• Gold prices fell around 2.0% to $4,044.00 an ounce, from the opening level of $4,120.52, which was also the session high.

• At Friday's settlement, gold lost around 0.1%, marking its fourth decline in five sessions, pressured by a stronger US dollar.

• The precious metal also fell 1.3% last week, posting its fifth weekly loss in the past six weeks amid renewed tensions in the Middle East and rising expectations of a US interest rate hike.

US dollar

The dollar index rose 0.25% on Monday, extending gains for a second consecutive session and reflecting continued strength in the US currency against a basket of major and minor currencies.

Safe-haven demand for the dollar returned as military tensions between the United States and Iran escalated over control of the Strait of Hormuz, threatening to derail the framework agreement and revive direct confrontation between the two sides.

Global oil prices

Oil prices surged more than 4% on Monday and were on track to reach their highest level in several weeks as concerns over supply disruptions from the Gulf region intensified after Iran announced the closure of the Strait of Hormuz.

The sharp rise in global oil prices has renewed fears of accelerating inflation, which could push central banks worldwide toward near-term interest rate hikes, marking a significant shift from pre-war expectations for rate cuts or an extended period of unchanged borrowing costs.

Latest developments in the Iran conflict

• US Central Command launched a third intensive round of airstrikes along Iran's coastline.

• The US bombardment followed attacks by Iran's Revolutionary Guard Navy on commercial vessels in the Strait of Hormuz.

• Iran expanded its military attacks on Gulf countries following the US strikes and announced the closure of the Strait of Hormuz.

• Trump said the Strait of Hormuz was "open and will remain open" to shipping through the use of military force, while the US Treasury revoked temporary licenses allowing Iranian oil sales.

• Iran's Foreign Ministry said Washington had undermined diplomatic efforts and violated the terms of the framework agreement.

• Iranian Parliament Speaker Mohammad Bagher Ghalibaf declared that the era of "unequal agreements" was over and that Washington would pay the price.

US interest rates

• Amid rising oil prices, CME Group's FedWatch tool showed that the probability of the Federal Reserve leaving interest rates unchanged at its July meeting fell from 78% to 68%, while the probability of a 25-basis-point hike rose from 22% to 32%.

• Markets are currently pricing a 24% probability that the Fed will leave rates unchanged at its December meeting and a 76% probability of a 25-basis-point increase.

• Investors are closely monitoring incoming US economic data and comments from Federal Reserve officials to reassess those expectations.

• Key US inflation data for June will be released on Tuesday and is expected to have a significant impact on the future path of US interest rates.

• Markets will also closely follow new Federal Reserve Chair Kevin Warsh's first semiannual testimony before Congress on Tuesday and Wednesday.

SPDR fund

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell by around 3.2 metric tons on Friday, bringing the total down to 1,002.45 metric tons, the lowest level since July 2.

The euro came under pressure against a basket of major global currencies in European trading on Monday, extending its losses for a second consecutive session against the US dollar as investors shifted away from riskier assets and back into the US dollar amid renewed military tensions between the United States and Iran over control of the Strait of Hormuz.

Meanwhile, the surge in global oil prices has increased expectations that the European Central Bank could deliver one additional 25-basis-point interest rate hike before the end of the year, with investors awaiting further economic data from the eurozone.

The Price

• The euro fell around 0.3% against the US dollar to $1.1384, from Friday's closing level of $1.1415, after reaching an intraday high of $1.1405.

• The euro closed Friday down around 0.15% against the dollar, posting its first daily loss in three sessions as investors shifted away from riskier assets.

• The single currency lost 0.2% against the dollar last week, marking its third weekly decline in a month as renewed military strikes between the United States and Iran weighed on sentiment.

US dollar

The US Dollar Index rose 0.25% on Monday, extending its gains for a second consecutive session as the greenback strengthened against a basket of major global currencies.

Demand for the dollar as a safe-haven asset picked up again as military tensions between the United States and Iran escalated over control of the Strait of Hormuz, raising fears that the framework agreement could collapse and direct confrontation between the two countries could resume.

Global oil prices

Oil prices surged more than 4% at the start of Monday's trading, putting crude on track to reach its highest levels in several weeks after Iran announced the closure of the Strait of Hormuz, fueling concerns over potential supply disruptions from the Gulf region.

The sharp rise in oil prices has also reignited concerns about accelerating inflation, increasing the likelihood that major central banks could raise interest rates in the near term, marking a significant shift from pre-war expectations for prolonged rate cuts or an extended period of policy stability.

Latest developments in the Iran conflict

• The US Central Command (CENTCOM) launched a third wave of intensive airstrikes along Iran's coastline.

• The latest US strikes followed attacks by Iran's Islamic Revolutionary Guard Corps Navy on commercial vessels in the Strait of Hormuz.

• Iran expanded its military operations against Gulf states following the US strikes and announced the closure of the Strait of Hormuz.

• President Donald Trump said the Strait of Hormuz is "open and will remain open" through the use of military force, while the US Treasury revoked temporary licenses allowing Iranian oil sales.

• Iran's Foreign Ministry accused Washington of undermining diplomatic efforts and violating the terms of the framework agreement.

• Iranian Parliament Speaker Mohammad Bagher Ghalibaf declared that the era of "unequal agreements" is over and warned that Washington would "pay the price."

European interest rates

• Money markets are currently pricing around a 25% probability of a 25-basis-point European Central Bank rate hike at the July meeting.

• The probability of a 25-basis-point ECB rate hike in December has climbed to above 95%.

• Investors are awaiting additional eurozone data on inflation, unemployment, and wage growth to reassess those expectations.

The Japanese yen weakened against a basket of major and minor currencies in Asian trading on Monday, resuming its decline against the US dollar after a two-day rebound, as renewed military tensions between the United States and Iran around the Strait of Hormuz boosted demand for the US dollar as a preferred safe-haven asset.

At the same time, rising global oil prices have intensified concerns over inflationary pressures in Japan, increasing expectations that the Bank of Japan may be forced to raise interest rates in the near term, with investors awaiting further economic data from the world's fourth-largest economy.

The Price

• The US dollar rose around 0.3% against the yen to ¥162.17, from Monday's opening level of ¥161.71, after touching an intraday low of ¥161.62.

• The yen ended Friday's session up 0.45% against the dollar, posting its second consecutive daily gain and its strongest daily advance in about 10 days after the Japanese government encouraged pension funds to increase investments in domestic assets.

• The yen lost 0.2% against the dollar last week, marking its third weekly decline in a month, as concerns over the interest rate gap between Japan and the United States continued to weigh on the currency.

US dollar

The US Dollar Index rose 0.25% on Monday, extending its gains for a second consecutive session as the greenback strengthened against a basket of major global currencies.

Demand for the dollar as a safe-haven asset picked up again as military tensions between the United States and Iran escalated over control of the Strait of Hormuz, raising fears that the framework agreement could collapse and direct confrontation between the two countries could resume.

Global oil prices

Oil prices surged more than 4% at the start of Monday's trading, putting crude on track to reach its highest levels in several weeks after Iran announced the closure of the Strait of Hormuz, fueling concerns over potential supply disruptions from the Gulf region.

Latest developments in the Iran conflict

• The US Central Command (CENTCOM) launched a third wave of intensive airstrikes along Iran's coastline.

• The latest US strikes followed attacks by Iran's Islamic Revolutionary Guard Corps Navy on commercial vessels in the Strait of Hormuz.

• Iran expanded its military operations against Gulf states following the US strikes and announced the closure of the Strait of Hormuz.

• President Donald Trump said the Strait of Hormuz is "open and will remain open" through the use of military force, while the US Treasury revoked temporary licenses allowing Iranian oil sales.

• Iran's Foreign Ministry accused Washington of undermining diplomatic efforts and violating the terms of the framework agreement.

• Iranian Parliament Speaker Mohammad Bagher Ghalibaf declared that the era of "unequal agreements" is over and warned that Washington would "pay the price."

Japanese interest rates

• As global oil prices climbed, markets increased the implied probability of a 25-basis-point Bank of Japan rate hike at an upcoming meeting to above 30%.

• The probability of a 25-basis-point rate hike at the October meeting has risen to above 85%.

• Investors are awaiting additional data on inflation, unemployment, and wage growth in Japan to reassess those expectations.