Iran launched expanded retaliatory strikes across the Gulf on Sunday and Monday, targeting U.S. military facilities in Kuwait and Bahrain and shutting down the Strait of Hormuz for the second time as Washington responded with fresh attacks on Iranian military sites. The Iranian Revolutionary Guard said it destroyed radar systems in Oman, struck fuel depots at Prince Hassan Air Base in Jordan, and conducted a drone attack on a Kurdistan Freedom Party base in Iraq, while missile alerts sounded in Bahrain and Kuwait.
The U.S. military said it struck Iranian military sites with fighter jets, naval forces and drones to protect shipping through the vital waterway, which carries a significant portion of global energy shipments. The Times of Israel reported the fresh wave of U.S. strikes came after Tehran's weekend assault on American positions throughout the region.
The Strategic Chokepoint
Tehran's repeated closure of the Strait of Hormuz represents a direct challenge to international commerce and energy security. Brent crude futures rose 3% to $78.50 a barrel on Monday as markets absorbed the implications of disrupted Gulf shipping. The strait's status as a critical artery for global oil transport makes any Iranian interdiction a matter of international concern beyond the immediate U.S.-Iran confrontation.
U.S. and Iranian forces exchanged heavy missile and drone assaults over the weekend, with the conflict expanding beyond maritime targets to include ground installations across multiple countries. The strikes in Kuwait, Bahrain, Oman, Jordan and Iraq demonstrate Iran's capacity to project force throughout the region through both direct action and proxy networks.
Market Reaction and Fed Implications
The dollar showed volatility on Monday, rising as much as 0.3% before dropping 0.2% to 100.83 on the dollar index. The euro gained 0.15% to $1.1433, sterling held flat at $1.339, and the Australian dollar slipped 0.1% to $0.694. Oil prices climbed as investors weighed the conflict's potential to disrupt energy supplies.
Thomas Mathews, head of markets for Asia Pacific at Capital Economics in Wellington, noted the dollar's different starting position compared to previous regional 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 U.S. central bank's December meeting, up slightly from Friday, according to the CME Group's FedWatch tool. Westpac analysts wrote in a research report that 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 later this month.
Yen Pressure and Intervention Watch
The Japanese yen slid 0.2% to 162.05 against the dollar on Monday after Reuters reported Tokyo had no imminent plans to change the asset allocations of its state pension funds. The move put traders back on alert for possible intervention from Japanese authorities as the currency languished at 40-year lows.
The yen and Japanese bonds had rallied on Friday after Finance Minister Satsuki Katayama said three days ago the government would seek ways to encourage pension funds, including the Government Pension Investment Fund, to make greater investments in Japanese financial assets. Two government sources told Reuters the initiative won't lead to immediate revisions to GPIF's medium-term objectives, though the government is exploring ways to boost such investments within existing allowable ranges.
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:
Iran's ability to strike U.S. facilities across multiple countries while closing the Strait of Hormuz demonstrates the strategic challenge facing Washington in the Gulf. Tehran's expanded regional reach through both direct military action and proxy networks complicates any American response that seeks to deter aggression without triggering wider conflict. The closure of Hormuz threatens global energy markets at a moment when inflation concerns are already driving Fed policy toward tightening, creating a feedback loop where military escalation reinforces economic pressure. Markets are pricing in the possibility that sustained conflict could force additional rate hikes, even as investors remain uncertain whether the dollar will benefit as much from safe-haven flows as it has in previous regional crises. The convergence of military strikes, shipping disruption, and monetary policy uncertainty creates conditions where miscalculation on any front could amplify instability across all three.