Iran shut down the Strait of Hormuz for the second time and expanded retaliatory strikes across the Gulf on Sunday and Monday, targeting U.S. military facilities in Kuwait and Bahrain after Washington launched a new wave of attacks against Iranian military sites. The closure of the vital shipping route — through which a significant portion of global energy shipments pass — sent oil prices climbing and rattled financial markets, underscoring how rapidly military escalation can threaten the international economy and civilian populations dependent on stable energy supplies.
The Iranian Revolutionary Guard said it targeted U.S. military facilities in Bahrain and Kuwait, destroyed radar systems in Oman, and struck fuel depots at Prince Hassan Air Base in Jordan, according to The Times of Israel. There was also a drone attack on a base of the Kurdistan Freedom Party in Iraq and missile alerts in Bahrain and Kuwait. The U.S. military said it struck Iranian military sites with fighter jets, naval forces and drones to protect shipping.
The Economic Shockwave
Brent crude futures rose 3% to $78.50 a barrel on Monday as investors absorbed the implications of a second Hormuz closure and the weekend's heavy missile and drone assaults between U.S. and Iranian forces. The dollar initially jumped along with oil prices before losing ground, with the euro up 0.15% at $1.1433 and the dollar index last down 0.2% at 100.83. Sterling was flat at $1.339 and the Australian dollar down 0.1% at $0.694.
Thomas Mathews, head of markets for Asia Pacific at Capital Economics in Wellington, noted the dollar's different starting position compared to previous conflicts. "The dollar was obviously the big winner from the war last time. But it's starting from a pretty different point this time, having strengthened quite a lot and there already having been a fairly lasting repricing of the Fed outlook," he said. "It's not clear to me the greenback would gain as much this time if the situation continued to worsen, which I think is probably reflected in trade so far."
Fed funds futures were pricing an implied 50% probability of two or more rate hikes by the time of the U.S. central bank's December meeting, up slightly from Friday, according to the CME Group's FedWatch tool. Inflation risks were likely to remain in focus with U.S. CPI data due on Tuesday, PPI gauges the following day, and Fed Chair Kevin Warsh's testimony before the House and Senate this month, Westpac analysts wrote.
Japan's Currency Crisis Deepens
The Japanese yen slid against the dollar on Monday after Reuters reported that Tokyo had no imminent plans to change the asset allocations of its state pension funds. The dollar was last up 0.2% at 162.05 yen, putting traders back on alert for possible intervention from authorities as the Japanese currency continued to languish at 40-year lows.
The yen and Japanese bonds had rallied on Friday after Finance Minister Satsuki Katayama said the government would seek ways to encourage pension funds, including the Government Pension Investment Fund, to make greater investments in Japanese financial assets. But while the government is exploring ways to boost such investments within the existing allowable ranges of the benchmark portfolio, the initiative won't lead to immediate revisions to GPIF's medium-term objectives, two government sources told Reuters.
Chris Turner, head of global markets at ING, said intervention was a prospect this week but added that "intervention alone cannot reverse the current bull trend." He said, "For that to happen, energy prices need to come lower and the Fed must conclude that it does not need to hike rates after all."
Why This Matters:
The closure of the Strait of Hormuz and the expanding military confrontation between the U.S. and Iran represent more than a regional security crisis — they're a direct threat to global economic stability and the everyday lives of millions who depend on affordable energy. Rising oil prices will hit consumers worldwide, particularly in developing countries where fuel and food costs consume a larger share of household budgets. The conflict also demonstrates how quickly military escalation can spiral beyond the control of any single actor, with strikes now spanning Kuwait, Bahrain, Oman, Jordan, and Iraq. Diplomatic de-escalation remains the only path that protects both regional populations and the global economy, but with each round of retaliation, that window narrows. The international community's ability to broker a ceasefire will determine whether this remains a contained crisis or becomes a broader catastrophe with civilian populations paying the highest price.