Dollar Strengthens as Trump Warns Iran over U.S. Troop Deaths, Risk Aversion Rises

The U.S. dollar strengthened on Monday (20th) as President Trump stated that Iran must pay a price for the deaths of three U.S. service members, heightening market risk aversion.

With relatively few U.S. economic data releases this week and the Federal Reserve (Fed) entering its pre-meeting blackout period, markets expect escalating Middle East tensions to be the primary driver of dollar movements.

In late New York trading, the U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, rose 0.2% to 100.94.

The dollar weakened last week due to shifts in monetary policy expectations. Better-than-expected U.S. inflation data reduced market expectations for a near-term Fed rate hike.

The dollar declined 0.2% last week as economic data showed a slowdown in the Consumer Price Index (CPI) and cooling in the Producer Price Index (PPI). Additionally, retail sales at gas stations declined month-on-month, while the University of Michigan consumer sentiment index rose to its highest level since February, with one-year inflation expectations falling.

These figures suggest the Fed is under no immediate pressure to tighten monetary policy further. According to the CME FedWatch tool, the market’s probability of a 25-basis-point rate hike by the end of July has dropped from nearly 42% at the beginning of the month to around 16% currently.

However, June’s inflation slowdown was largely due to a sharp drop in oil prices after a temporary peace agreement between the U.S. and Iran.

Recently, Middle East conflict has escalated again, sending oil prices soaring and reigniting concerns about inflationary pressures.

Several Fed officials have emphasized that the fight against inflation is not yet over. Dallas Fed President Lorie Logan suggested that interest rates may still need to be "moderately higher."

With limited U.S. economic data this week and the Fed in its pre-meeting silence period, market focus has shifted to Thursday’s European Central Bank (ECB) interest rate decision.

The ECB became the first major G7 central bank to raise rates in June in response to inflationary pressures from Middle East tensions. Markets widely expect the ECB to hold rates steady this time but may signal a hawkish stance, emphasizing that further hikes in the fall remain data-dependent.

The euro fell 0.2% against the dollar to 1.1414.

Trump: Iran Will Pay the Price

Tensions between the U.S. and Iran continue to escalate.

The U.S. military has conducted airstrikes against Iran for nine consecutive days, while Iran continues to attack critical infrastructure in the Persian Gulf region.

U.S. Central Command reported on Sunday that three U.S. service members were killed in an Iranian attack.

President Trump posted on Truth Social on Monday: "Every time Iran kills an American soldier, they will pay many times over! I have given this instruction to Defense Secretary Pete Hegseth, Chairman of the Joint Chiefs Daniel Caine, and all military leaders."

New Prime Minister Takes Office, Pounds Under Pressure

The British pound fell 0.2% against the dollar to 1.3434.

New UK Prime Minister Andy Burnham, in his first speech from Downing Street, stated he would never risk the British economy and would adhere to the fiscal rules set by the previous government.

Burnham pledged to introduce policies to reduce the cost of living while maintaining fiscal discipline. When asked whether he would increase borrowing to stimulate investment, he said he would stick to existing fiscal rules, allowing flexibility only within permitted limits.

Additionally, Burnham appointed former Defense Secretary John Healey as the new Chancellor of the Exchequer, succeeding Rachel Reeves.

Exchange rates as of approximately 6:00 a.m. Taiwan time on Tuesday (21st):

- U.S. Dollar Index: 100.9930 (+0.0247%) - Euro to U.S. Dollar (EUR/USD): 1 EUR = 1.1410 USD (-0.0350%) - British Pound to U.S. Dollar (GBP/USD): 1 GBP = 1.3422 USD (-0.0596%) - Australian Dollar to U.S. Dollar (AUD/USD): 1 AUD = 0.6992 USD (-0.1000%) - U.S. Dollar to Canadian Dollar (USD/CAD): 1 USD = 1.4078 CAD (+0.0569%) - U.S. Dollar to Japanese Yen (USD/JPY): 1 USD = 162.4700 JPY (-0.0185%)