By Jiaxing Li and Amanda Cooper
HONG KONG/LONDON, May 18 (Reuters) – The dollar dipped against a range of major currencies on Monday, but held near last week’s highs, as fresh tensions in the Middle East pushed up global bond yields, while weakness in the yen kept traders watching out for possible intervention.
The euro was last up 0.1% at $1.1635 and sterling was up 0.2% at $1.3351.
The dollar index, which tracks the U.S. currency against six others, was a touch softer at 99.12, having posted its strongest weekly performance in three months last week.
“It appears conditions for risk and bonds are deteriorating and conditions for the dollar rally to extend this week are ripe,” analysts at Barclays wrote in a note.
Signs that the Strait of Hormuz will remain closed for longer are also exerting upward pressure, with the dollar gaining 0.5% to 1% for every 10% rise in oil prices, they added.
Oil prices climbed on Monday, with Brent crude futures rising more than 1% to over $110 a barrel, after a nuclear power plant in the United Arab Emirates came under attack and efforts to end the U.S.-Israeli war on Iran appear to have stalled.
Further denting risk appetite, a global bond rout deepened on Monday as rising energy prices fanned inflation fears and stoked wagers on rate hikes from global central banks.
Benchmark 10-year U.S. Treasury yields jumped to 4.6310% and the two-year yield hit a high of 4.1020%, both near their highest points since February 2025.
Commerzbank strategist Michael Pfister said shifting expectations for interest rates – and the subsequent rise in bond yields – were at the heart of the dollar’s relative resilience.
“Although expectations regarding the Fed had shifted significantly towards a more restrictive monetary policy from the outset, market participants were still reluctant to bet on interest rate hikes. This changed last week, with expectations regarding the Fed shifting most markedly among the G10,” he said.
Minutes from the Federal Reserve’s last meeting and U.S. flash purchasing managers’ surveys later this week should help clarify how concerned the central bank is about persistent inflation and whether activity momentum is holding up, Christopher Wong, FX strategist at OCBC, said in a note.
Markets are now pricing in a more than 50% chance that the Fed would raise rates by December, according to the CME FedWatch tool.
Investors are also watching as the Group of Seven finance ministers and central bankers meet in Paris on Monday and Tuesday to discuss how to bring a lasting end to the war in Iran.
The yen last traded at 158.9, around its weakest since April 29, which put investors on alert for a possible intervention.
Officials in Tokyo intervened a couple of times in late April and into early May, which saw the yen strengthen by around 3.5% in the days that followed, but the currency has given up roughly 7% of that rally already.
Japan’s government is likely to issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the Middle East war, a government source with direct knowledge of the deliberations told Reuters on Monday.
Meanwhile, the offshore yuan weakened to 6.808 yuan per dollar. The meetings between U.S. President Donald Trump and Chinese President Xi Jinping last week offered no major breakthroughs, while data released on Monday showed China’s growth lost momentum in April.
(Additional reporting by Jiaxing Li in Hong Kong; Editing by Jacqueline Wong, Thomas Derpinghaus and Susan Fenton)
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