The situation in the Middle East is escalating, combined with expectations of a US Federal Reserve interest rate hike, causing international oil prices to surpass $100 per barrel. The US dollar index is poised for its best weekly performance in a month.

As the conflict in the Middle East continues to escalate and international oil prices break through $100 per barrel, market risk aversion is increasing and the US dollar strengthened on Thursday. The Bloomberg US Dollar Spot Index rose by 0.3%, on track to achieve its best weekly performance in nearly a month. The US dollar rose against almost all major currencies on the day, with the New Zealand dollar performing the weakest. Meanwhile, the Swiss franc fell to a more than one-year low, and the Japanese yen continued to hover around its lowest level in about 40 years, falling to as low as 163.96 yen against the US dollar. Chief economist Win Thin of Bank of Nassau 1982 stated, "With both the yen and the franc weakening at the same time, the US dollar remains the biggest winner in the current market environment." As international oil prices rise and reignite market concerns about inflation, US Treasury yields are also rising, further supporting the US dollar. US President Trump stated that any future attacks by the Houthi forces in Yemen on Red Sea vessels will be blamed on Iran, which could further escalate US involvement in the Middle East conflict. The situation in the region has yet to show signs of easing. Meanwhile, market focus is turning to the upcoming Federal Reserve monetary policy meeting next week, with some investors expecting another rate hike by the Federal Reserve. Brent Donnelly, President of Spectra Markets, stated that the market is likely to buy the US dollar in advance, betting that the Federal Reserve will signal a hawkish stance at the July meeting. If the Federal Reserve hints at plans to hike rates in September, it will be enough to continue supporting the US dollar. Since taking over as Federal Reserve Chair in May, Powell has broken the tradition of guiding market expectations through forward guidance, leading to significant disagreements about the outcome of the July meeting. Currently, pricing in the interest rate futures market suggests a 35% probability of a 25 basis point rate hike in July by the Federal Reserve. Donnelly stated that if Powell ultimately fulfills rate hike expectations, the US dollar will receive further support. Alex Cohen, FX strategist at Bank of America, also expects the US dollar to have further room for appreciation this summer.