BRICS marks its 20th anniversary with the release of the New Delhi Declaration, confirming plans to continue expanding membership, deepen cooperation in finance, trade and security, advance a BRICS cross-border payment framework, and improve exercises under the Contingent Reserve Arrangement.

Saudi Arabia’s East-West oil pipeline was hit by a drone attack and shut down as a precaution, raising concerns over crude supply and directly increasing the geopolitical risk premium in oil prices.

Iran and Oman have also held consultations on the security of navigation through the Strait of Hormuz, with the outcome expected to be announced at a regional meeting in Oman on September 14. Iran stressed that Gulf security should be managed through consultation among regional countries and opposed external intervention. An explosion was also reported on Iran’s southern Qeshm Island last week, keeping regional shipping risks in focus.

The United States held nationwide commemorative events marking the 25th anniversary of the September 11 attacks, with President Biden delivering remarks.

The European Central Bank raised interest rates by 25 basis points, lifting the deposit facility rate to 2.50%, primarily in response to a rebound in energy-driven inflation. Market views have become increasingly divided, with some institutions expecting another rate hike in December. European bonds came under selling pressure, while the euro remained volatile.

The probability of a 25-basis-point Federal Reserve rate hike in September has risen to nearly 90%. Goldman Sachs, JPMorgan, Nomura and TD Securities have all raised their interest-rate forecasts and adopted a more hawkish outlook, with some expecting multiple rate increases before year-end.

Market reaction: US Treasury yields moved higher, while the US dollar initially rallied before giving back gains. Asian equities became more volatile, with the Nikkei 225 experiencing a sharp pullback during the week. Risk assets came under pressure, while precious metals saw significant short-term volatility.

Review of Last Week’s Market Performance

US stock indices closed higher on Friday, ending a four-session losing streak as oil prices and Treasury yields paused their recent advances. The S&P 500 rose 0.9%, the Dow Jones gained 509 points, and the Nasdaq 100 climbed 0.9%. For the week, the S&P 500 fell 0.6%, the Nasdaq declined 0.7%, and the Dow lost 426 points.

Gold rose to around $4,350 per ounce on Friday but fell nearly 1% for the week, marking its third consecutive weekly decline as investors digested the latest US inflation data and prepared for next week’s Federal Reserve meeting. Last week’s labour market data continued to show resilience. Market expectations for a 25-basis-point Fed rate hike next week increased, with the CME FedWatch Tool indicating a probability of around 86%, up from roughly 70% before the inflation data.

Silver climbed to around $65 per ounce on Friday but declined more than 1% for the week as investors assessed the latest US inflation figures ahead of next week’s Fed meeting. US producer prices accelerated in August as the conflict involving Iran pushed wholesale energy costs higher, while last week’s labour market data continued to show resilience. Expectations for a 25-basis-point Fed rate hike next week also increased.

The US Dollar Index closed last week near the 99.00 area, little changed on the day and holding onto the ground regained following Thursday’s brief volatility after the release of US inflation data. The dollar enters a crucial week in familiar territory, with the underlying tone remaining firm, although the hawkish interest-rate narrative has yet to produce a decisive breakout.

EUR/USD closed near 1.1590, with a slightly softer intraday tone. Ahead of Wednesday’s Federal Reserve decision, the pair remains largely dependent on the direction of the US dollar. A hawkish Fed rate hike would put pressure on the euro, although the dollar’s repeated failure to hold onto gains continues to provide some support.

USD/JPY hovered around 153.70, moving lower as a softer US dollar met a firmer Japanese yen. Friday’s Bank of Japan meeting will be the key domestic focus, with markets leaning towards a rate hike to 1.25%, which would bring Japanese interest rates to their highest level in decades. With both the Fed and BOJ potentially tightening policy in the same week, risks remain tilted towards further yen strength.

GBP/USD traded around 1.3525, broadly unchanged on the day, with the UK finally facing a more eventful domestic economic calendar. The Bank of England will announce its decision on Thursday and is expected to keep rates unchanged at 3.75%, although markets expect around three policymakers to vote for a rate hike. Sterling has its own domestic catalysts, but the broader direction will still be heavily influenced by the Fed.

AUD/USD traded near 0.7170, standing out among major currency pairs and remaining firm heading into the weekend. Australia’s domestic calendar is relatively light, with Governor Bullock’s speech on Thursday the main event. As a result, the Australian dollar will be driven largely by risk sentiment, Chinese activity data released on Monday and guidance from the Federal Reserve. A hawkish surprise from the Fed remains the clearest threat to the AUD’s recent gains.

Crude oil paused its rally on Friday, closing around $96 per barrel after Iranian state media reported that Tehran would meet Gulf countries in Oman to discuss issues surrounding the Strait of Hormuz. Saudi Arabia also shut its East-West crude pipeline as a precaution following repeated attacks, while Iran-backed Houthi forces were reportedly advancing towards Yemen’s Perim Island. Oil prices gained 9.7% over the week.

Bitcoin staged a sudden rebound. Despite stronger-than-expected core CPI data and rising expectations for a Fed rate hike, Bitcoin recovered towards the $79,000 level. Headline CPI was broadly in line with expectations, while monthly core CPI came in above forecasts, prompting clients to reassess the interest-rate outlook ahead of next week’s Federal Reserve meeting. Bitcoin initially fell following the data before recovering its losses.

The US 10-year Treasury yield stood at around 4.92% on Friday, slightly below Thursday’s level but still close to its 2023 highs, as markets weighed lower oil prices against stronger-than-expected core CPI data. Core CPI rose 0.3% month-on-month, accelerating from 0.2% in July and exceeding expectations of 0.2%. Meanwhile, the Treasury’s latest buyback operation resulted in lower-than-expected purchases. The US government repurchased $5.2 billion of bonds, below the $6 billion maximum and equivalent to roughly half of the $10.5 billion offered.

Market Outlook for This Week

This week, September 14–18, global financial markets enter a crucial period featuring major central bank decisions and a concentrated release of domestic and international macroeconomic data.

From domestic credit, consumption and industrial data to inflation and employment indicators across the US, Europe and the UK, markets face a packed schedule. The Federal Reserve, Bank of England and Bank of Japan will all announce interest-rate decisions, while a geopolitical meeting concerning the Strait of Hormuz will take place at the same time. The combination of these factors could significantly affect global asset pricing. Investors should closely monitor policy signals and turning points in economic data while remaining alert to the risks and opportunities created by heightened market volatility.

On the geopolitical front, Gulf states and Iranian foreign ministers will meet to discuss temporary navigation arrangements for the Strait of Hormuz. The meeting will take place in Salalah, Oman. Any change in the shipping situation through the Strait could quickly affect crude oil and safe-haven assets.

Major Central Bank Decisions: Fed and Bank of England in Focus

The Federal Reserve will announce its September interest-rate decision at 2:00 a.m. on Thursday, September 17. The Bank of England will announce its September decision later in the day, with markets expecting the Bank Rate to remain unchanged at 3.75%.

Following the decisions, both the Fed and Bank of England will hold press conferences. Comments from policymakers will be central to how markets interpret the future direction of monetary policy, potentially triggering significant volatility across foreign exchange, US Treasuries and global equity markets.

The Bank of Japan will announce its interest-rate decision on Friday. Markets currently expect a 25-basis-point increase to 1.25%. BOJ Governor Kazuo Ueda will then hold a monetary policy press conference, with his comments likely to have a direct impact on the Japanese yen and Japanese equities.

Risk Warning: Central Banks, Macro Data and Geopolitical Uncertainty

In addition to the major economic releases and central bank meetings above, investors should pay particular attention to four key risks during the week:

Risk of unexpected central bank signals: The Federal Reserve, Bank of England and Bank of Japan will all announce interest-rate decisions and hold press conferences. If policy outcomes or policymakers’ comments are more hawkish or dovish than markets have priced in, major currency pairs, bonds and equities could reprice rapidly, leading to a significant increase in volatility.

Risk of divergence in domestic macroeconomic data: If social financing, industrial production, retail sales and other major domestic indicators come in significantly above or below expectations, they could directly affect domestic assets and commodities that are highly sensitive to Chinese demand.

Uncertainty surrounding the Strait of Hormuz: Gulf states and Iran will meet to discuss navigation arrangements through the Strait. If negotiations encounter difficulties, markets could quickly price in renewed concerns over crude supply, pushing oil prices and safe-haven assets higher.

Volatility in Western inflation, consumption and employment data: Canadian CPI, UK CPI, US retail sales and UK wage data could alter expectations for the future pace of central bank policy if they point to persistent inflation or rapidly weakening domestic demand, amplifying cross-market volatility.

Conclusion

Constructive dialogue between the Gulf Cooperation Council and Iran over tanker movements could help curb the recent surge in oil and gas prices at a time when financial markets are increasingly concerned about the inflation outlook. The outcome could also influence global borrowing costs as the Federal Reserve determines its interest-rate policy. BRICS countries will also hold meetings.

25 Years of US Fiscal Policy: The Turning Point in America’s Debt Crisis

Following the end of the Cold War, the United States benefited from a prolonged peace dividend, reduced military spending and strong economic growth. The country maintained fiscal surpluses for an extended period, leaving its fiscal fundamentals in a highly stable position. After more than two decades of expanding geopolitical conflicts, combined with demographic and structural economic challenges, the US has moved decisively away from the era of fiscal surpluses and into persistent deficits and rising debt.

Global geopolitical risks are now continuing to intensify while America’s fiscal buffer and ability to absorb shocks are weakening. This new combination of rising external risks and deteriorating domestic fiscal strength is reshaping the pricing logic of global asset classes.

From Fiscal Surplus to $40 Trillion in Debt: A Complete Reversal in US Finances

Following the end of the Cold War, US military spending declined, while fiscal reforms in the 1990s and the economic gains from the internet boom helped the federal government maintain regular budget surpluses. Confidence in both the US dollar and US Treasuries reached historic highs.

Two major geopolitical conflicts this century, the Afghanistan War and the current Middle East conflict, have followed similar negative fiscal transmission patterns and have become major contributors to America’s deteriorating debt position. Both are prolonged conflicts requiring sustained expenditure rather than short-term military engagements. Continued overseas military spending has placed substantial pressure on US finances and eroded the post-Cold War peace dividend.

The Afghanistan War was the first to reverse the US fiscal trend. Massive military expenditure diverted resources away from domestic industries and public services, redirected private capital and weighed on underlying economic growth. The current Middle East conflict has extended and amplified this negative pattern, adding further pressure to government finances.

The two conflicts share several long-term negative effects.

First, prolonged military expenditure combined with multiple rounds of tax cuts has continuously widened the fiscal gap, contributing to a rapid accumulation of government debt.

Second, because the conflicts have centred on strategically important global energy regions, they have disrupted crude oil supply chains, pushed up global commodity and industrial prices and generated persistent inflationary pressure.

Third, prolonged overseas conflicts have weakened confidence in US global leadership, leading markets to increasingly question the traditional system in which the dollar’s credibility is partly supported by American military power.

Compared with the Afghanistan War, the current Middle East conflict has a much stronger compounding effect.

US federal debt has now exceeded $40 trillion, leaving fiscal buffers significantly depleted. Additional military spending, renewed inflation and upward pressure on interest rates directly increase the risks associated with debt sustainability and confidence in the US dollar.

As the Middle East sits at the heart of the petrodollar system, geopolitical instability in the region not only pushes inflation higher, forces Treasury yields upward and increases debt-servicing costs, but also places pressure on the foundations of the petrodollar system. This could accelerate global diversification away from the dollar, transforming America’s fiscal and debt challenges into a broader risk for the global monetary system.

Academic research has also suggested that prolonged excessive overseas defence spending can absorb productive social resources and has been one contributing factor to slower US economic growth and weaker fiscal conditions over the past two decades.

Structural Risks and Black Swan Events Add to Debt Pressure

In addition to geopolitical conflicts, multiple black swan events and structural challenges have continued to increase pressure on US debt.

The 2008 Global Financial Crisis, the COVID-19 pandemic and the retirement of the baby boomer generation have all added pressure. The US Social Security trust funds are expected to face depletion risks around 2032, while mandatory spending pressures continue to increase.

Since 2000, the US has maintained a relatively loose approach towards fiscal deficits while implementing three rounds of tax cuts. Federal revenue as a share of GDP has fallen from 19.1% to 16.7%, reinforcing the structural imbalance between government revenue and expenditure.

Together, these factors have pushed total US federal debt from $3.4 trillion in 2000 to around $40 trillion today, including $32 trillion held by the public. Mandatory social spending has increased from 7.8% to 10.1% of GDP, while non-interest expenditure has also expanded. Military spending, by comparison, has increased at a relatively more moderate pace.

Most concerning is that annual US government interest expenditure has now exceeded $1 trillion, surpassing military spending and becoming a major warning sign for the country’s fiscal position.

Global Military Expansion Pushes Rates Higher and Globalises Debt Risks

Persistent geopolitical risks have triggered a broader global military expansion. As the United States gradually reduces its role as the dominant provider of global security and a more multipolar world emerges, countries are increasing defence spending to strengthen their own security.

Data show that global military expenditure as a share of GDP has risen from below 2.2% in 2022 to nearly 2.5%, while defence spending across the European Union and Japan has also increased significantly. Global defence expenditure appears to be entering a prolonged upward cycle.

Even if regional conflicts temporarily ease, geopolitical tensions in Europe and security competition in the Persian Gulf are likely to persist, making a reversal in defence spending growth increasingly difficult.

The US has proposed increasing military spending by 43% in fiscal year 2027 to more than $1.5 trillion. Although Congress is likely to reduce the final amount, replenishing military capacity and expanding defence expenditure have become established policy priorities, already supporting defence-sector equities.

The Afghanistan and Middle East conflicts, combined with America’s persistent fiscal deficits, have contributed to higher long-term bond yields globally. Since the Middle East conflict escalated in late February, disruption to shipping through the Strait of Hormuz has pushed crude oil and diesel prices higher, increasing global inflation and logistics costs and adding to selling pressure in bond markets.

Long-term government bond yields across several countries have reached multi-year highs. Debt has increasingly shifted from being purely an economic issue to becoming a political challenge, while global debt risks continue to build.

Beyond government borrowing, substantial debt issuance by major technology companies to fund AI investment is adding further upward pressure on interest rates. Long-term AI-related debt issued by leading technology companies this year has reached $310 billion, equivalent to around 50% of the US Treasury’s long-term issuance, adding to supply-demand imbalances in bond markets and helping keep yields elevated.

Policy Response to the US Debt Crisis: Treasury and Fed Support

Facing rising debt and elevated long-term Treasury yields, US policymakers have begun implementing measures aimed at supporting the market.

Views on US debt risks remain divided. Some institutions argue that concerns surrounding the $40 trillion debt burden are overstated, while organisations including the Brookings Institution have warned that the underlying risks may be greater than headline market pricing suggests.

To reduce the risk of disorderly conditions in the Treasury market and contain long-term yields, the US Treasury has introduced bond buyback operations. Meanwhile, Federal Reserve Chair Warsh adopted a strongly hawkish anti-inflation stance at Jackson Hole, reversing his earlier dovish tone.

Markets have widely interpreted these developments as a new degree of coordination between the Federal Reserve and Treasury, with the central objective of stabilising long-term Treasury yields amid large fiscal deficits and preventing rapidly rising interest expenses from creating systemic financial risks.

JPMorgan has warned that without major structural reform, the United States could enter a prolonged period of gradual debt deterioration. An external shock or policy mistake could potentially turn that slow deterioration into a more severe debt crisis, triggering significant volatility across global financial markets.

Debt Is Reshaping Asset Pricing: Strengthening the Long-Term Bull Case for Gold

Two decades of expanding debt and increasingly persistent global debt risks have fundamentally reshaped the pricing framework for major asset classes, strengthening the long-term bullish case for gold.

Traditionally, gold is viewed as a non-yielding asset and tends to have a negative relationship with US Treasury yields. Higher interest rates therefore generally place pressure on gold prices.

However, the market’s pricing framework is changing. Concerns over US Treasury credibility and America’s debt burden are increasingly becoming more important drivers of gold than short-term interest-rate fluctuations.

America’s $40 trillion debt burden and annual interest expenses exceeding $1 trillion continue to place pressure on confidence in the US dollar.

At the same time, the Afghanistan War weakened America’s fiscal position, while the current Middle East conflict is placing pressure on the petrodollar system. Together, these geopolitical developments are challenging the traditional safe-haven status of US dollar assets.

Against this backdrop, gold, which carries no sovereign credit risk, has become an important asset for hedging against US debt risks, geopolitical conflict and weakening confidence in the dollar. This has also encouraged global central banks to continue accumulating gold and diversifying their Treasury holdings, providing a stronger underlying foundation for gold prices.

In the short term, expectations for Fed rate hikes and elevated Treasury yields may continue to pressure gold, keeping prices volatile at high levels.

However, the long-term deterioration in US debt dynamics remains difficult to reverse. Measures by the Federal Reserve and Treasury to support the bond market may delay the emergence of risks but could also further weaken confidence in the dollar, reinforcing demand for gold as a hedge.

Conclusion

Markets are likely to continue focusing on the long-term themes of weakening confidence in the US dollar and rising global debt. Short-term pullbacks caused by interest-rate volatility may continue to create opportunities for gold exposure. Until US debt risks are meaningfully resolved, the long-term upward trend in gold is likely to remain supported, with the debt cycle becoming one of the fundamental drivers behind the broader bullish outlook.

Gold Reaches a Historic Milestone; the Fed Plays It Down, but the Bigger Trend Remains

There is an old saying in business: if something has already attracted widespread attention and someone is working hard to explain why it is “not that important”, that may be a sign that its significance is greater than it first appears.

The Federal Reserve’s latest research provides a relevant example. The market recently reached a historic milestone: in 2025, the total market value of official gold reserves held by countries around the world surpassed the value of their US Treasury holdings.

This milestone was reached for the first time in 2025 and was subsequently acknowledged by major financial institutions including the International Monetary Fund. It marked an important shift in the structure of global reserve assets. However, the Federal Reserve has sought to play down its significance by focusing on technical factors.

The timing of the Fed’s comments is particularly notable. The US Treasury recently announced plans to double its purchases of long-term Treasuries through its bond buyback programme. Although officials have not described this as yield-curve management, the signal should not be ignored.

The logic is straightforward: if there were sufficient private and institutional demand for long-term Treasuries, the US government would have less need to intervene directly to support liquidity. Against this backdrop, gold’s growing importance within the global reserve system deserves greater attention rather than being dismissed.

Objectively, the Federal Reserve’s interpretation is not entirely unreasonable, and two of its arguments have some merit.

First, the value of global gold reserves overtaking Treasury holdings was primarily driven by the sharp increase in international gold prices rather than a sudden surge in central bank gold purchases. Central bank buying has not increased explosively. Instead, the rise in gold valuations created the historic difference.

Second, a substantial share of global official gold reserves consists of legacy holdings accumulated during the Bretton Woods era rather than assets purchased by central banks in recent years.

However, these technical details do not eliminate the broader significance of the milestone.

Even the Federal Reserve’s own data indicate that, excluding the United States’ large gold reserves, the market value of sovereign gold reserves worldwide reached $4 trillion by the end of 2025, slightly exceeding the $3.9 trillion in US Treasuries held by those countries.

More importantly, the actions of global central banks already demonstrate gold’s growing strategic importance.

Central bank gold purchases have remained elevated in recent years, with annual buying roughly double the average level recorded during the previous decade. Industry surveys show that a record 45% of central banks plan to increase their gold reserves over the next 12 months, while 89% expect total global central bank gold reserves to rise.

Looking further ahead, 84% of industry institutions expect gold’s share of global reserves to increase over the next five years, while 74% expect the US dollar’s share of global reserves to gradually decline.

This broad industry consensus suggests that central banks no longer view gold simply as an outdated legacy of the Bretton Woods system, but increasingly as a core strategic reserve asset.

This does not mean that the US dollar will immediately lose its position as the world’s dominant reserve currency, nor does it mean US Treasuries have lost their value. Treasuries remain among the world’s most liquid and deepest financial markets, and their position is unlikely to be displaced in the near term.

Conclusion

The key trend worth watching is that the reserve allocation strategy of global central banks has changed.

Countries are becoming less dependent on the US dollar and US Treasuries alone, increasingly treating gold as a strategic reserve asset that can sit alongside, or partially replace, dollar-denominated holdings.

The Federal Reserve may use technical details to explain why gold overtaking Treasuries was partly driven by exceptional circumstances, but it cannot ignore the broader structural shift behind the milestone: gold has once again become a major monetary asset within the global financial system.

Talking Oil Down While Raising the Stakes: US-Iran Tensions Keep the Oil Price Battle Alive

The market’s core narrative is clear: the United States is attempting to suppress oil prices through economic pressure and bearish messaging, while Iran is using control over the Strait of Hormuz and military deterrence to maintain a geopolitical risk premium. With these opposing forces pulling in different directions, oil prices are likely to remain volatile and range-bound.

US Post-War Middle East Strategy Raises the Risk of Regional Confrontation

The Trump administration is drafting a new post-war Middle East strategy aimed at reshaping the regional order and containing Iran over the longer term. Key proposals include building a coalition of regional allies, implementing a Gaza framework, advancing Israel-Syria and Israel-Lebanon security agreements, expanding the Abraham Accords and promoting normalisation between Saudi Arabia and Israel.

The strategy remains at an early drafting stage and will be influenced by Israel’s October election and the US midterm elections in November.

However, a comprehensive strategy aimed at containing Iran could further intensify Iranian opposition, encourage resistance from regional groups and significantly increase uncertainty surrounding shipping in the Persian Gulf, creating longer-term upside risks for crude oil.

Iran Escalates Maritime Countermeasures and Works With Oman on the Strait

In response to continued pressure, Iran has introduced a new countermeasure framework designed to reshape navigation rules in the Strait of Hormuz. Iran plans to establish a new controlled maritime zone covering waters extending from the US blockade line into the Persian Gulf. Commercial vessels entering the area without prior notification could be placed on sanctions lists, affecting their insurance coverage and future access through the Strait.

Iran has clearly outlined its main conditions: the United States must end military threats and attacks against Iran and comply with the US-Iran peace memorandum before Iran guarantees normal navigation through the Strait. Otherwise, shipping restrictions will remain in place.

On the military front, intense confrontations involving oil tankers took place in Gulf waters on September 5. US forces reportedly struck three Iranian tankers near Kharg Island, Jask Port and the Gulf of Oman, leaving the vessels unable to operate.

Iran responded by attacking several US military vessels and commercial tankers accused of violating navigation restrictions. Tehran also warned commercial vessels throughout the Persian Gulf against using routes designated by the US. The direct maritime confrontation significantly increased shipping risks, with traffic through the Strait falling to its lowest level since May and reinforcing the geopolitical risk premium in crude oil.

Iran also targeted vessels accused of violating its restrictions and tested anti-ship missiles as a warning to US aircraft carriers. It reportedly identified several US military bases as potential targets while deliberately refraining from striking them, preserving room for further escalation.

US Economic Pressure Hits Iran as the Strait’s Deterrent Effect Weakens

The United States has used a combination of maritime restrictions and extensive sanctions to place broad economic pressure on Iran. Iran’s government finances, oil exports and foreign-exchange channels are increasingly constrained, while domestic inflation remains elevated. Shortages of essential goods including fuel and wheat have added pressure on households and increased the risk of domestic instability.

Washington hopes that sustained economic pressure will force Iran to allow unrestricted navigation through the Strait of Hormuz. However, markets have gradually adapted to disruptions in the Strait, while alternative global energy supplies have reduced the impact. As a result, Iran’s earlier strategy of disrupting shipping to trigger a global energy crisis and pressure the US into concessions has become less effective.

Nevertheless, Iran continues to demonstrate significant resilience. Wartime national solidarity has supported public tolerance of economic pressure, while the Revolutionary Guard appears willing to absorb economic costs and retain military options. A near-term compromise therefore remains unlikely, leaving US-Iran negotiations at an impasse.

The Core Oil Battle: US Bearish Messaging vs Iran’s Geopolitical Risk Premium

The current volatility in oil prices directly reflects the competing narratives of the United States and Iran.

The US is pursuing a combination of physical pressure and bearish market messaging. On the physical side, it is attempting to weaken Iran’s economic capacity and regional influence. On the messaging side, US officials and prominent investors have continued to publish bearish oil forecasts. Treasury Secretary Scott Bessent has suggested oil could fall to $40 per barrel, while prominent investor Cathie Wood has presented an even more bearish scenario of around $30 per barrel.

Such comments effectively form part of a broader market narrative aimed at reducing crude oil’s geopolitical risk premium, easing domestic inflation pressure and weakening bullish sentiment.

Iran, meanwhile, is pursuing a strategy of supporting prices while avoiding full escalation. Rather than completely closing the Strait and risking a full-scale war, Tehran is using controlled zones, restrictions on commercial vessels and military deterrence to maintain uncertainty around shipping. This raises insurance and transportation costs, supports the geopolitical premium in crude oil and increases the economic cost of the confrontation for the US in an attempt to gain negotiating leverage.

Limits of the Conflict and Potential Paths Towards Resolution

Both sides face clear limitations, making a sustained one-way move in oil prices difficult.

Extremely bearish US oil forecasts depend on an optimistic scenario in which the conflict ends quickly and Washington successfully implements its broader Middle East strategy. If US-Iran tensions escalate or Iranian resistance intensifies, this bearish argument could quickly weaken.

At the same time, Iran’s verbal threats are having a diminishing effect on oil prices. Sustained price spikes are increasingly likely to require actual shipping incidents or a significant escalation in military conflict.

Markets are currently considering a potential compromise in which Iran abandons transit fees for vessels passing through the Strait while retaining the right to charge legitimate fees for navigation, security and environmental services. Such an arrangement could provide both sides with a politically acceptable way to reduce tensions.

Conclusion

The US and Iran remain locked in a prolonged confrontation. Crude oil is therefore likely to continue fluctuating between US efforts to suppress prices and geopolitical pressure generated by Iran. The geopolitical risk premium is likely to remain embedded in oil pricing over the longer term.

Technical: Following the recent sustained rise in international oil prices, participation from both institutional and retail clients has increased significantly. Overall volatility has expanded over the past four trading sessions, reflecting growing disagreement between market participants. The wider swings following the rally could lead to a correction. Key levels to watch include support around the 5-day moving average and the daily double-top resistance near 93.14.

US-Iran Conflict Pushes Oil Higher, Rate-Hike Expectations Rise, Yet the Dollar Falls for Three Straight Days: The Unusual Logic Behind the Move

The US Dollar Index extended its decline, falling towards 98.70 and reaching its lowest level since August 24, putting it on track for another consecutive session of weakness.

The move appears contradictory. Surging oil prices are increasing inflation expectations, while the CME FedWatch Tool shows the probability of a September rate hike has climbed to 60%. At the same time, US employment data has remained strong. Yet the dollar has failed to establish sustained upside momentum.

The market is sending an interesting signal: inflation concerns and rate-hike expectations are increasing, but the Dollar Index is not rushing into another rally. This suggests the foreign-exchange market is no longer operating according to the simple formula of “strong data = stronger dollar”. Instead, multiple factors are influencing how capital is being priced and allocated.

US Political Signals Conflict With the Fed’s Policy Direction

At the same time, political voices in the United States have expressed views that conflict with the Federal Reserve’s policy stance.

Donald Trump has rejected the argument that higher interest rates would stabilise the debt market and has instead publicly called on the Federal Reserve to cut rates. Treasury Secretary Scott Bessent has argued that if the Middle East conflict ends and international oil prices fall sharply towards $40–$50 per barrel, US Treasury yields could decline accordingly.

The divergence between political messaging and the Federal Reserve’s policy direction has made the policy outlook more difficult for markets to assess and has also limited the dollar’s ability to build upward momentum.

Why Isn’t a 60% Rate-Hike Probability Supporting the Dollar?

1. The Market Has Already Priced It In

A 60% probability of a rate hike is not entirely new information. Markets have gradually priced in the possibility of another Fed increase over recent weeks.

With the probability now around 60%, the scope for a further substantial increase is more limited, reducing the marginal impact on market pricing. The dollar has already received some support from rate-hike expectations and is now entering a period where much of the positive news has already been priced in, leaving it without a fresh catalyst.

2. Clients Remain Cautious Ahead of US Inflation Data

US PPI on Thursday and CPI on Friday are the key variables markets are waiting for. Until then, investors may be reluctant to build large long-dollar positions at current levels because any significant deviation from expectations could trigger a rapid reversal.

Against this backdrop, investors may question what could prevent the Federal Reserve from raising rates soon and supporting the dollar in the process. However, Fed Chair Warsh’s Jackson Hole comments provide an important reminder: yesterday’s news can easily be mistaken for what is happening today. This observation is particularly relevant to bond markets, where changes in the narrative can quickly cloud the monetary-policy outlook.

3. US Equities and Risk Sentiment Create a Counterbalancing Effect

Despite rising rate-hike expectations, US equities have remained relatively resilient. AI-related spending, economic resilience and corporate earnings growth continue to support risk appetite.

As long as risk sentiment does not deteriorate significantly, demand for the US dollar as a safe-haven asset may remain somewhat constrained.

This Week’s Key Variables: PPI and CPI Will Set the Tone

The market’s next major directional move will depend heavily on US Producer Price Index and Consumer Price Index data. These releases will directly influence expectations surrounding the Federal Reserve’s September policy decision.

Recent data and market volatility should not be overinterpreted. In the current environment, understanding the Fed’s uncertainty may be more important than simply betting on whether rates will rise.

If inflation data are moderate, expectations for a rate hike could fall quickly, placing further downward pressure on the dollar. If inflation exceeds expectations, rate-hike probabilities could rise further and provide renewed support for the dollar.

Until then, the market remains in a relatively quiet pre-data period, with a clearer directional breakout likely requiring a stronger inflation signal.

Conclusion

The US Dollar Index has weakened for three consecutive sessions despite surging oil prices, growing inflation concerns and a September rate-hike probability of around 60%.

This divergence between rising rate-hike expectations and a weaker dollar reflects several factors, including the fact that higher-rate expectations have already been partly priced in, caution ahead of major economic data and relatively stable risk sentiment.

US PPI and CPI will be crucial in determining whether the dollar can regain upward momentum. Moderate inflation could keep the dollar under pressure, while stronger-than-expected inflation could reinforce rate-hike expectations and support the currency. Until then, the dollar may remain largely range-bound.

Key Overseas Economic Events and Data This Week

Monday, September 14: Japan July Industrial Production Revised (MoM); Canada August Core Consumer Price Index – Common (YoY)

Tuesday, September 15: UK July Unemployment Rate; Eurozone July Seasonally Adjusted Trade Balance (€bn); US September New York Fed Manufacturing Index

Wednesday, September 16: Japan August Seasonally Adjusted Merchandise Trade Balance (JPY bn); UK August Consumer Price Index (YoY); UK August Non-Seasonally Adjusted Producer Output Price Index (YoY); US August Retail Sales (MoM); US September NAHB Housing Market Index

Thursday, September 17: Eurozone August Consumer Price Index Final (MoM); UK Official Bank Rate; US Four-Week Average of Seasonally Adjusted Initial Jobless Claims; US August NAR Seasonally Adjusted Pending Home Sales Index (MoM)

Friday, September 18: Japan August National Consumer Price Index (YoY); UK August Seasonally Adjusted Retail Sales (YoY)

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