Peace is proving more dangerous than war—this is the paradox the current US administration is grappling with as the conflict drags on. While Donald Trump seeks a face-saving exit from the standoff, Tehran is categorically refusing to let him have it. The seizure of an oil tanker in the Strait of Hormuz, coupled with a surge in activity by pro-Iranian Houthis in the Red Sea, has not only pushed Brent crude out of its familiar $80–$90 per barrel trading range but also effectively derailed the upward momentum of the EUR/USD pair.
While energy prices were consolidating, monetary policy remained the primary driver. A string of weak macroeconomic releases from the US slashed the probability of Fed tightening in September from 50% to 31%. Futures markets were pricing in a mere 21-basis-point increase in the federal funds rate through the end of 2026, despite earlier convictions of more aggressive moves. In Europe, the picture was a mirror image: the odds of an autumn ECB rate hike stood at 84%, with markets pricing in 38 basis points of tightening by year-end. This divergence was firmly playing into the hands of euro bulls—that is, until oil breached the $91 mark.
The result was a rapid surge in 30-year US Treasury yields to nearly two-decade highs. At this point, it hardly matters how quickly or slowly other global central banks are adjusting their rates. Prior to the latest Middle Eastern escalation, the market narrative was clear: the Fed was behind the curve while other central banks were ahead of it. That narrative has now been shattered, handing the US dollar the perfect setup for a counterattack—one it was quick to seize.
Tehran seized a vessel in the Strait of Hormuz, citing the owner’s refusal to pay transit fees. In response, Donald Trump threatened to all but wipe Oman off the map, accusing the nation of duplicity. According to him, Muscat is effectively playing on the side of the Islamic Republic, facilitating Tehran’s tightening grip on the world’s most critical oil chokepoint.
Meanwhile, US strategic petroleum reserves have plummeted to their lowest levels since 1982, further underscoring that the market is coiled like a tight spring. The longer the Middle East conflict smolders, the higher the chances of Brent blasting past the psychological $100 per barrel mark. This inevitably raises the risk of a fresh inflationary spike and forced Fed tightening, automatically laying the groundwork for a supremely strong dollar.
Especially given that the relentless rally in US Treasury yields will sooner or later trigger a correction in the S&P 500, chill the global appetite for risk, and vastly amplify demand for the greenback as the ultimate safe-haven asset.
