Dollar Set for Biggest Surge in a Year as Inflation Fears Mount

The dollar headed for its biggest two-day rally in almost a year as the deepening war in Iran stoked inflation fears and spurred demand for havens.

The ’s 0.8% advance on Tuesday put it on track for its strongest back-to-back run since a rebound notched in April last year, when the initial panic over US President Donald Trump’s trade tariffs was easing. The 10-year Treasury yield rose seven basis points to the highest in three weeks as traders dialed down expectations of interest-rate cuts.

The widening conflict in the Middle East is lifting energy prices and boosting the greenback as inflation expectations spiral. Crude oil spiked above $85 a barrel for the first time since July 2024, while European natural gas prices surged more than 40% to the highest since 2023.

Against that backdrop, traders are curbing expectations for Federal Reserve easing by year-end. Money markets price 37 basis points of Fed cuts this year, down from 60 basis points on Friday.

Options markets echoed the dollar’s spot moves. Traders now need to pay to hedge against a broad rally in the dollar, a sharp contrast to just a few days ago when options pricing showed them historically undecided on where the currency would move next.

Meanwhile, risk reversals — a barometer of market positioning — indicated dollar sentiment over a short time horizon hasn’t been this bullish since June.

Most of the dollar’s Group-of-10 currency peers fell by 1% or more on Tuesday. Real-money accounts drove a sizable share of the spot flows, trimming recent long positions in the euro and the pound, according to traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.