By Jiaxing Li
HONG KONG, May 18 (Reuters) – The dollar was on the defensive against most major currencies on Monday as fresh Middle East tensions lifted oil prices and a global bond selloff stoked rate-hike bets, while yen weakness kept traders on alert for a possible intervention.
The euro was last at $1.1621 and sterling fetched $1.3320, both down roughly 0.03%.
The risk-sensitive Australian dollar weakened 0.2% to $0.7132, while the New Zealand dollar was little changed at $0.5837.
The dollar index, which measures the greenback against a basket of major currencies, was flat at 99.325.
“It appears conditions for risk and bonds are deteriorating and conditions for the dollar rally to extend this week are ripe,” analysts at Barclays wrote in a note.
Signs that the Strait of Hormuz will remain closed for longer are also exerting upward pressure, with the dollar gaining 0.5% to 1% for every 10% rise in oil prices, they added.
Oil prices climbed on Monday, with Brent crude futures rising more than 1% to over $110 a barrel, after a nuclear power plant in the United Arab Emirates came under attack and efforts to end the U.S.-Israeli war on Iran appear to have stalled.
Further denting risk appetite, a global bond rout deepened on Monday as rising energy prices fanned inflation fears and stoked wagers on rate hikes from global central banks.
Benchmark 10-year U.S. Treasury yields jumped to 4.6310% and the two-year yield hit a high of 4.1020%, both near their highest points since February 2025.
“Near term, USD may stay better bid on dips if yields remain elevated and markets continue to price a more hawkish Fed reaction function,” Christopher Wong, FX strategist at OCBC, said in a note.
Minutes from the Federal Reserve’s last meeting and U.S. flash purchasing managers’ Indexes later this week should help clarify how concerned the central bank is about persistent inflation and whether activity momentum is holding up, Wong added.
Markets are now pricing in a more than 50% chance that the Fed would raise rates by December, according to the CME FedWatch tool.
Investors are also watching as the Group of Seven finance ministers and central bankers meet in Paris on Monday and Tuesday to discuss how to bring a lasting end to the war in Iran.
The yen was last traded at 158.97, the weakest level since April 29, with its renewed weakness putting investors on alert for a possible intervention.
Japan’s government is likely to issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the Middle East war, a government source with direct knowledge of the deliberations told Reuters on Monday.
Elsewhere, the offshore yuan weakened to 6.8150 yuan per dollar. The meetings between U.S. President Donald Trump and Chinese President Xi Jinping last week offered no major breakthroughs, while data released on Monday showed China’s growth lost momentum in April.
(Reporting by Jiaxing Li in Hong Kong; Editing by Jacqueline Wong and Thomas Derpinghaus)
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