Dollar climbs on renewed Middle East attacks, Hormuz closure

By Gregor Stuart Hunter

SINGAPORE, July 13 (Reuters) - The dollar rose against most of its peers as a renewal of hostilities in the Middle East fanned inflation fears and raised prospects for interest rate hikes among global central banks.

Against Japan's currency , the dollar was up 0.2% at 162.075 yen. The euro weakened 0.1% to $1.1397 while the British pound slipped 0.2% to $1.3374. 

The Australian dollar was down 0.3% at $0.6928 while its kiwi counterpart eased 0.1% to $0.5757.

U.S. and Iranian forces exchanged heavy missile and drone assaults at the weekend, with Tehran targeting U.S. facilities in states across the Gulf on Sunday and saying it had again closed the vital Strait of Hormuz shipping route. 

Oil prices rose in Asian trade, with Brent crude futures up 4.1% at $79.11 a barrel.

"After the flare-up into the end of last week which continued over the weekend, the dollar has responded, and the crude oil price has been the driver," said Tony Sycamore, market analyst at IG in Sydney. "This reinflames concerns that if the energy prices rise from here, we could start to see rate hikes pulled forward."

Fed funds futures are pricing an implied 50.9% probability of two or more rate hikes by the time of the U.S. central bank's December meeting, up from a 47.6% chance on Friday, according to the CME Group's FedWatch tool.

The U.S. dollar index, which measures the greenback's strength against a basket of six currencies, was up 0.1% at 101.13 after earlier touching its highest level since July 8.

"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.

"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."

Inflation risks are likely to remain in focus with the release of U.S. CPI data on Tuesday, PPI gauges the following day, and Fed Chair Kevin Warsh's testimony before the House and Senate, Westpac analysts wrote in a research report.

The Bank of Japan may revise up its economic growth forecast for fiscal 2026 and keep its focus on the risk of an inflation overshoot as rising costs from a weak yen and strong AI demand offset some of the declines in oil prices, three sources familiar with the central bank's thinking told Reuters.

In cryptocurrencies, bitcoin lost 2.1% to $62,790.02 while ether shed 2.3% to $1,779.01.

(Reporting by Gregor Stuart Hunter; Editing by Jamie Freed and Kevin Buckland)