By Amanda Cooper and Laura Matthews
NEW YORK/LONDON, Oct 12 (Reuters) - The dollar held near an 18-month high on Monday, supported by safe-haven demand as an escalating Middle East conflict kept investors cautious ahead of key US inflation data later this week.
Oil prices were volatile after Yemen's Iran-backed Houthis stepped up strikes on Saudi Arabia, and two tankers were attacked over the weekend.
Brent crude futures rose 2.09% to $106.80 a barrel, nearing a two-week high, as the attacks overshadowed
Sunday's announcement from US President Donald Trump about an energy ceasefire between Ukraine and Russia. The futures price is still nearly 45% above where it was before the US-Israeli war with Iran started.
The dollar index, which tracks the US currency against six others, was up 0.16% at 102.39, just below last week's 18-month high.
Weekly data from the US markets regulator shows investors have been adding to their bullish positions on the dollar, which rose to around $36 billion in the week to October 7 from $8.4 billion three weeks ago, largely at the expense of the euro.
"Markets got off to a relatively encouraging start to the week, but sentiment has since deteriorated as renewed geopolitical uncertainty and rising oil prices weigh on risk appetite, prompting a fresh round of US dollar demand," said Joel Kruger, a market strategist at LMAX Group in London.
SPOTLIGHT MOVES TO US INFLATION DATA
Wednesday's US consumer inflation report, one of the last major economic releases before the Federal Reserve's policy meeting this month, could be critical in determining the near-term direction of the dollar.
Data last week showed US consumer sentiment deteriorated further in early October, as the rising cost of living because of the Middle East conflict soured households' views of the economy.
The Fed raised rates last month for the first time since 2023 to rein in inflation, with markets keeping a close watch on economic data to gauge whether policymakers may move again. Traders are pricing in an 81% chance of the Fed standing pat this month, up from 51% a month earlier, the CME FedWatch tool showed.
"The real focus is on the CPI number this week, it is likely to be running hot," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. He added that a rate hike before an election is so uncommon that "the bar is kind of high" for the Fed to act.
Sharp selloffs in bond markets in the past few weeks worried investors as borrowing costs across the globe rose to multi-decade highs on concern over inflation, energy prices and ballooning government debt.
The euro fell 0.19% to $1.1180, after clocking a fifth straight week of losses last week, driven by investor angst around France's fiscal health before the 2027 presidential election. The spread between French 10-year yields and safer German yields traded at 140 basis points. Last week it neared 160 bps, the most since 2012.
"It is still too early to tell whether higher borrowing costs will be sufficient to impose greater fiscal discipline on the French government," said OCBC FX strategists.
Against the yen, the US dollar was a touch higher on the day at 158.57 yen in holiday-thinned trading in Japan, while the pound held steady at $1.323.
(Reporting by Amanda Cooper in London and Laura Matthews in New York; Additional reporting by Li Gu in Shanghai and Ankur Banerjee in SingaporeEditing by Peter Graff, Colin Barr and Emelia Sithole-Matarise)
