By Ankur Banerjee and Li Gu
SINGAPORE/SHANGHAI, Oct 12 (Reuters) - The dollar held its ground near the strongest level in a year and a half on Monday as an escalating Middle East conflict kept investors wary ahead of key US inflation data later this week that will influence monetary policy.
Oil prices were volatile after Yemen's Iran-backed Houthis stepped up strikes on Saudi Arabia while two tankers were attacked over the weekend.
Prices were also influenced by Sunday's announcement from US President
Donald Trump about an energy ceasefire between Ukraine and Russia. Brent crude futures were down 1.4% at $103.3 per barrel in Asian hours. [O/R]
The dollar index, which measures the greenback's strength against a basket of six currencies, was slightly down at 102.16 but remained not far from the 18-month peak it scaled last week. Trading was confined to a tight range with Japanese markets shut for a holiday, thinning liquidity across the region.
"We expect the Houthis to continue their attacks on Saudi Arabian energy assets, supporting gains in the oil price and the USD," analysts at Commonwealth Bank of Australia said in a note.
They added that while Iran had confirmed receiving a US peace proposal through intermediaries, "we do not expect a breakthrough this week."
Against the yen, the US dollar was down 0.06% at 158.245 yen. The Australian dollar and its kiwi counterpart were both roughly flat at $0.69815 and $0.56080, respectively.
SPOTLIGHT MOVES TO US INFLATION DATA
Beyond the geopolitical backdrop, the market's focus turns to Wednesday's US Consumer Price Index report, one of the last major economic releases before the Federal Reserve's late-October meeting on interest rates.
Data last week showed US consumer sentiment slumped 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.
"It's a very high bar for the Fed to raise rates in October," said Chris Weston, head of research at Pepperstone. "But if we do see a hot number, the question becomes whether they could go again in January — hiking in December and then potentially again in January, as opposed to the market's view that they go again in March."
Severe selloffs in bond markets in the past few weeks had left investors worried as borrowing costs across the globe rose to multi-decade highs on worries over inflation, energy prices and ballooning government debt.
The euro was up nearly 0.1% at $1.121, after clocking a fifth straight week of losses as the common currency bore the brunt of investor angst around France's fiscal health amid political uncertainty before the 2027 presidential election. The spread between French 10-year yields and relatively safe German yields widened to 137 basis points, near its highest 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.
"We expect EURUSD to consolidate as the intensity of French fiscal and political headlines is unlikely to be sustained," they said in a note, adding any rally in the euro is likely to be capped by Europe’s structural challenges.
The Indian rupee climbed 1% to 95.8 against the dollar after the central bank moved to alleviate pressure on the currency by diverting oil companies’ dollar purchases away from the spot market.
The South Korean won hit a two-year high, up 0.5% at 1,334 against the dollar.
The British pound inched 0.1% higher to $1.3245. Both the onshore and offshore yuan were roughly flat against the dollar.
(Reporting by Li Gu in Shanghai and Ankur Banerjee in Singapore; Editing by Muralikumar Anantharaman)
