The dollar index was firmer on Monday amid increased geopolitical uncertainty.
The latter could revive demand for the currency if tensions flare up. The rapid shift in Iranian rhetoric about the Strait of Hormuz during the weekend and the US seizure of an Iranian-flagged cargo vessel could leave markets on edge.
Tehran reversed its plans to reopen the Strait of Hormuz and signalled it would not participate in a second round of negotiations.
This shift could reinforce concerns over a prolonged disruption to global energy supply, fuelling inflation concerns once again and pushing Treasury yields to the upside. Meanwhile, interest rates are still expected to be on hold this year, which could continue to support yields and the dollar.
However, hopes that the situation could evolve in a positive manner could leave the dollar at risk to a certain extent. In this regard, traders could continue to monitor the developments in the region and any progress in the negotiations between the US and Iran.
Looking ahead, attention will turn to a series of key economic releases, including retail sales, labour market indicators, and preliminary PMI data. These could provide further insight into the resilience of the US economy and could shape monetary policy expectations, while ongoing geopolitical developments are likely to remain the dominant driver of both treasury yields and the dollar in the near term.
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