Market News

By Chuck Mikolajczak (Reuters)

NEW YORK, July 23 (Reuters) — The U.S. dollar climbed to a fresh 40-year high against the Japanese yen and strengthened against the euro on Thursday as escalating tensions in the Middle East drove oil prices sharply higher and reinforced expectations that the Federal Reserve may raise interest rates.

The dollar benefited from rising energy prices, with Brent crude topping $100 per barrel for the first time since May after renewed hostilities involving Iran and Houthi forces disrupted key shipping routes. Investors increasingly believe that higher oil prices could fuel inflation, strengthening the case for tighter U.S. monetary policy.

The dollar index rose 0.36% to 101.47, while the euro fell 0.33% to $1.1372. The greenback was also on course for its largest daily gain in a month. U.S. crude rose 6.81% to $92.75 per barrel, while Brent crude gained 7.59% to $101.21.

The European Central Bank left interest rates unchanged, as widely expected, but signalled that another increase in September remains possible. ECB President Christine Lagarde said underlying inflation pressures remained contained, although higher energy prices posed a significant risk to the inflation outlook.

Market participants interpreted the ECB's cautious stance as supportive of continued U.S. dollar strength. Analysts noted that while both inflation and recession risks remain elevated in Europe, the central bank chose to wait before tightening policy further.

According to LSEG data, markets are pricing in a 71% probability of an ECB rate hike at its September meeting. Analysts at Morgan Stanley said an additional rate increase could support the euro, arguing that markets have not fully priced in the impact of tighter monetary policy.