Dollar up on safe-haven boost; fiscal worries weigh on pound, yen at 40-year low

The U.S. dollar on Tuesday hit its highest level in over a week, helped by elevated Treasury yields and safe-haven demand sparked by continued fighting in the Middle East. Meanwhile, the Japanese yen once again plumbed its weakest level against the greenback since 1986.

At 16:02 ET (20:02 GMT), the U.S. dollar index, which measures the greenback against a basket of six major peers, rose 0.2% to 101.17, its highest since July 13. 

Rate hike jitters remain in play as oil prices continue to rise 

The dollar index had been under pressure last week, after economic data showed a moderation in the headline U.S. consumer price index and producer price index. Separately, gasoline station retail sales fell on a monthly basis, while University of Michigan data showed July consumer sentiment hitting its highest level since February and a fall in year-ahead inflation expectations.

The indicators suggested some breathing room for the Federal Reserve in terms of not immediately tightening policy. However, the June moderation in price pressures was largely due to a slide in oil prices after the U.S. and Iran inked their interim peace deal.

The escalation in tensions between the two since has led to oil prices spiking once again, bringing inflationary fears back on the table. Several Fed speakers, including chair Kevin Warsh to Congress, last week said the fight against inflation was far from over, with Dallas Fed President Lorie Logan calling for "modestly higher" interest rates.

Crude benchmarks have already gained nearly 4% since Monday after posting double-digit percentage increases last week. The U.S. has kept up a bombardment against Iran for ten straight days, while the country has retaliated with attacks on a tanker in the Strait of Hormuz and by targeting U.S. military bases in the region.

"Iran’s been given every opportunity to negotiate, to show that they’re reasonable on the Strait of Hormuz - but if they’re going to shoot at commercial shipping, then we’re going to hit them...ten times harder. Every night, we’re degrading them further and further," U.S. Secretary of War Pete Hegseth told reporters at the Oval Office on Tuesday.

At the same event, President Donald Trump said Iran "desperately" wanted to meet, but "until they’re ready to meet in a meaningful way, we have no interest." The U.S. leader reiterated that Iran could not have a nuclear weapon, adding "any site where they’re even thinking about nuclear - we’ll be hitting it very, very powerfully."  

Gilts and sterling reflect fiscal worries as Burnham takes charge 

Turning to other major currencies, the sterling slipped - down 0.4% to $1.3379 - while benchmark British gilt yields rose for the second straight day of Andy Burnham’s term.

The seventh new prime minister of the United Kingdom in a decade, Burnham on Monday reaffirmed his commitment to follow his predecessor Keir Starmer’s fiscal rules. He is also in the process of completing his new cabinet, with his appointment of former defense secretary John Healey as finance minister sparking a rally in London-listed defense stocks.