Dollar Dips Amid Renewed Tensions in the Gulf, Yen Weakens

Singapore, Singapore Jul 13, 2026 ALN: [SINGAPORE/LONDON] The dollar slipped on Monday (Jul 13) after giving up earlier gains as investors focused on renewed hostilities in the Gulf, while the yen slid following a Reuters report that Japan had no immediate plan to change state pension funds’ asset allocations.

The US currency rose earlier in the session along with oil prices but later lost ground, with the euro up 0.15 percent at US$1.143. Sterling slipped very slightly to US$1.339, while the Australian dollar was flat at US$0.695. This fluctuation in currency values is reflective of broader market sentiments, which often react strongly to geopolitical events, particularly in regions critical to global oil supply.

US and Iranian forces exchanged heavy missile and drone assaults over the weekend, with Tehran targeting US facilities in states across the Gulf on Sunday. This escalation in military tensions has raised concerns over the stability of the region, particularly regarding the Strait of Hormuz, a vital shipping route through which a significant portion of the world's oil supply is transported. The Iranian government claimed to have closed this route, further intensifying fears of supply disruptions. Consequently, oil prices rose sharply, with Brent crude futures up 3.5 percent at US$78.65 a barrel. The dollar index, which tracks the currency against six peers, was last down 0.15 percent at 100.9, indicating a complex interplay between currency value and commodity prices.

“The dollar was obviously the big winner from the war last time. But it’s starting from a pretty different point this time, having strengthened quite a lot and there already having been a fairly lasting repricing of the Fed outlook,” said Thomas Mathews, head of markets for Asia Pacific at Capital Economics in Wellington. This statement underscores the importance of understanding the historical context of currency movements during geopolitical crises. Previous conflicts have often led to a flight to safety, with the US dollar benefiting as investors seek refuge in stable assets. However, the current market situation is nuanced, as the dollar had already appreciated significantly before the recent tensions.

“It’s not clear to me the greenback would gain as much this time if the situation continued to worsen, which I think is probably reflected in trade so far,” Mathews added. This perspective suggests that while the dollar may traditionally benefit from conflict, current market conditions, including the strength of the dollar prior to these events, could limit its upside potential.

Market expectations regarding US monetary policy are also influencing currency dynamics. Fed funds futures are pricing an implied 50 percent probability of two or more rate hikes by the time of the US central bank’s December meeting, up slightly from Friday, according to the CME Group’s FedWatch tool. The anticipation of interest rate changes has significant implications for the dollar, as higher rates typically attract foreign capital, increasing demand for the currency. However, the relationship between interest rates and currency value is complex and can be influenced by a myriad of factors, including inflation rates, economic growth, and geopolitical stability.

Inflation risks are likely to remain in focus with the release of US Consumer Price Index (CPI) data on Tuesday, followed by Producer Price Index (PPI) gauges the following day, and Fed Chair Kevin Warsh’s testimony before the House and Senate. The upcoming data releases are critical as they will provide insight into the current state of the US economy and inflationary pressures, which are central to the Federal Reserve's decision-making process regarding interest rates. Analysts at Westpac have highlighted the significance of these events, indicating that they could sway market perceptions and consequently impact currency valuations.

The Japanese yen slipped against the dollar on Monday after Reuters reported that Tokyo had no imminent plans to change the asset allocations of its state pension funds. The dollar was last up 0.2 percent at 162.08 yen, putting traders back on alert for possible intervention from authorities in Tokyo as the Japanese currency continues to languish at 40-year lows. The yen's weakness has been a persistent issue for the Japanese economy, which has struggled with low growth and deflationary pressures for decades. A weak yen can have mixed effects; while it may boost exports by making Japanese goods cheaper abroad, it can also increase the cost of imports, particularly energy, which Japan relies on heavily.

On Friday, the yen and Japanese bonds rallied after Finance Minister Satsuki Katayama stated that the government would seek ways to encourage pension funds, including the Government Pension Investment Fund (GPIF), to make greater investments in Japanese financial assets. This initiative is part of a broader strategy to stabilize the financial system and promote domestic investment. However, while the government is exploring ways to boost such investments within the existing allowable ranges of the benchmark portfolio, the initiative will not lead to immediate revisions to GPIF’s medium-term objectives, as two government sources indicated to Reuters. This cautious approach reflects the complexities and sensitivities surrounding pension fund management and the potential implications for financial markets.

Chris Turner, head of global markets at ING, commented on the potential for intervention, suggesting that it is a prospect this week. He noted, “intervention alone cannot reverse the current bull trend.” This statement highlights the challenges faced by policymakers in attempting to influence currency values through market interventions. For such interventions to be effective, broader economic conditions must also align. “For that to happen, energy prices need to come lower and the Fed must conclude that it does not need to hike rates after all,” Turner said. This insight reflects the interconnectedness of global markets, where developments in one area, such as energy prices, can have far-reaching effects on currency valuations and economic policies in other regions.