Dollar fights back as Middle East risks resurface

Dollar reacts after Friday’s weak performance 

Following a disastrous performance on Friday, adding to the weakness experienced in the last week of July, the dollar is trying to find its footing today. It is actually posting gains across the FX spectrum, at the time of writing, as investors appear to be gradually looking ahead to Wednesday’s US CPI report. 

Notably, the weak nonfarm payroll report was mostly a product of negative government payrolls and a potentially aggressive adjustment to the food services industry after the successful FIFA World Cup tournament. That said, the jobs data pushed out Fed rate hike expectations, proving to be the decisive factor for Friday’s dollar performance.

Looking ahead, Fedspeak and the July CPI report could prove critical for sentiment in the latter half of August, especially as the late August Jackson Hole Fed Symposium could prove more important than initially expected.

Middle East remains an open wound for markets

Part of the reason for today’s solid dollar performance is the latest Middle East developments. Despite articles and some lingering hopes for considerable progress made on the Iran-Oman negotiations over the Strait of Hormuz, with the US’s blessing, the latest information is not positive. 

Additional demands from Iran about reopening Hormuz, including war reparations, and fresh attacks on tankers stuck inside the Strait are another indication that an agreement is further away than investors believed last week, thus increasing the chances of renewed US-led military operations. President Trump has commented that he is using economic pressure to push Iran into an agreement, but his patience might run out soon enough. 

Understandably, oil prices are hovering around $78, pausing their dive from the late July high of $94.48, as investors question the chances of an interim agreement. Notably, the December 2026 WTI oil futures contract is more stable at $74, around 10% above its early July trough. Interestingly, the RBA meets on Tuesday morning – no expectations for a rate change – and it will be interesting to see if the latest drop in oil prices affects the overall stance of one of the most hawkish central banks at this stage.

Significant moves in both yen and gold since July 30

Coming back from a short break, the most striking market moves can be seen in dollar/yen and gold. The former got a massive boost from the July 30 long-overdue intervention and the slightly more hawkish BoJ meeting on July 31, but the pair has been gradually edging higher. It is currently hovering above the 158 level, despite today’s Summary of Opinions confirming some hawkish momentum among BoJ members, and markets assigning a 50% probability for a September rate hike.

More interestingly, gold has finally managed to take advantage of the persistent dollar weakness. Last week’s gold rise was the strongest move in both absolute and percentage terms since mid-January 2026, when gold was trading near $5,000.

There are upbeat reports from several investment banks about gold’s medium-term outlook, but it is evident that another bout of dollar-positive data releases, such as Wednesday’s US CPI report and Friday’s retail sales data, could quickly curtail gold demand. Additionally, the precious metal is currently hovering within a range, which, since October 2025, has dictated price action on five separate occasions.

US equities powering ahead

The mixed moves in the early part of today’s European session cannot mask the exuberance seen last week in US equity markets. The Nasdaq 100 index posted its strongest weekly rise since mid-May last week, finally managing to outperform its counterparts after a period of consistent underperformance. 

Strong earnings, lower Fed rate hike bets – the chances of a September Fed hike have dropped to 48% from 68% after the July 29 meeting - and lower US Treasury yields have been instrumental in the equity turnaround. However, while both the S&P 500 and Dow Jones 30 indices hit fresh all-time highs, the Nasdaq 100 index is still not out of the woods.