Middle East War Strengthens US Dollar, Yen Falls to 40-Year Low

JAKARTA - The United States dollar remained strong throughout the first half of this year. The war in the Middle East, inflation risks, and the Federal Reserve's tight monetary policy forecasts strengthened the dollar's position as a safe asset.

According to Anadolu Agency's report, quoted on Tuesday, July 14, the US Dollar Index closed the first half with an increase of about 3 percent to 101.2. The index measures the strength of the dollar against a number of major world currencies.

The U.S. Dollar Index started the year at 98.2 and reached 101.8 on June 24, its highest position since May 2025. Throughout the first half, the index remained around the 100 threshold.

The dollar strengthened against the euro, Swiss franc, Japanese yen, and pound sterling after US President Donald Trump implemented tariff policies and the Middle East war broke out in late February.

The greatest pressure was seen on the yen. The US dollar exchange rate against the yen hit 161.95 on June 29, the highest level since July 1986. This puts the yen in its weakest position against the dollar in 40 years.

The conflict began on February 28 when the United States and Israel launched a joint attack on Iran. Tehran then retaliated.

The biggest impact of the war is felt on oil shipments through the Strait of Hormuz, one of the world's most important energy distribution routes. Concerns about supplies have pushed oil prices higher and increased the risk of global inflation.

The rise in energy prices has led markets to revise their rate-hike forecasts. Before the war, markets had expected looser monetary policy. After inflationary pressures rose, forecasts shifted to tighter policy, including the possibility of maintaining or raising interest rates.

Markets expect the Fed to raise rates before the end of the year. The chances of further hikes next year are also starting to be taken into account in the money market.

The Fed kept its benchmark rate in a range of 3.5 percent to 3.75 percent at January, March, April and June meetings.

Kevin Warsh, who took office as Fed Chairman in June, reiterated that price stability remained the main goal. He stated that the 2 percent inflation target would be maintained until the determination and ability of the central bank to achieve it was proven again.

The European Central Bank or ECB is facing similar pressure. Energy supply shortages are expected to raise costs and add pressure on the euro.

The euro exchange rate against the US dollar fell to 1.13 on June 24, the lowest since May 2025. The euro then closed the first half at 1.1422.

Markets expect the ECB to raise rates one more time before the end of the year. The chances of a second hike are still open.