The United States and Iran each said Monday they controlled the Strait of Hormuz after a weekend of attacks across the wider Middle East, and the people who actually move through that waterway got the usual treatment: disruption, fear and a market panic that sent oil prices higher, lifted the dollar and pressured Asian shares.
The Strait as a State Prize
The U.S. military’s Central Command said its forces hit dozens of sites in Monday’s strikes, including air defense systems, radar sites, missile and drone equipment and small boats. Central Command said, “The Strait of Hormuz is a vital maritime corridor for global trade,” and added, “Iran does not control it.” Iran’s Revolutionary Guard rejected that account, saying, “The Strait of Hormuz is our territory, and we will not allow a rogue and child-killing army from the other side of the world to continue its illegal interference in it.” Iran described the strait as being closed, while the U.S. military and President Donald Trump said it remained open.
The attacks began after Iran struck a container ship Sunday in the strait off the coast of Oman. The waterway once saw a fifth of the world’s traded crude oil and natural gas pass through it. Shipping has been disrupted since the start of the war as Iran maintained a chokehold on the route by attacking commercial vessels around it and intimidating shippers. The U.S. military said around 20 vessels had been escorted through the strait in the previous 24 hours, though ship tracking sites showed little traffic moving. So much for free passage. The corridor is treated like a bargaining chip by armed states, and everyone else is left to wait for the next closure, escort, or strike.
United Nations Secretary-General António Guterres said in a statement, “A return to full-scale hostilities would have catastrophic consequences.” Iran and the U.S. were nearly at the midway point of the 60-day period of an interim deal that was supposed to set up talks for a permanent end to the war, but it had instead devolved into a series of attacks over the strait and its future. A regional official involved in mediation, speaking on condition of anonymity, said efforts to shore up the ceasefire continued Sunday. Pakistan said its foreign minister spoke by phone with Iran’s top diplomat and urged “de-escalation” on both sides. The diplomatic machinery keeps talking while the guns keep deciding.
Civilians, Sirens and Cross-Border Fire
Missile alert sirens sounded three times Monday in Bahrain, home to the U.S. Navy’s 5th Fleet, and Kuwait said it was intercepting hostile fire. There was no immediate word on damage in either country. In Jordan, the kingdom’s military said it shot down four Iranian missiles in an incident that “resulted in zero casualties or material damage.” Iran’s authorities reported attacks in Hormozgan, Khuzestan and Markazi provinces and at least two people were killed, according to state-run IRNA news agency. Semiofficial Iranian media also reported strikes on Sistan and Baluchestan province. Iranian attacks on Sunday stretched Bahrain, Kuwait, Qatar, Jordan and Oman, whose territorial waters with Iran make up the strait. Oman, which long has been an interlocutor between Tehran and the West, summoned an Iranian diplomat to criticize the attack.
Meanwhile Monday, a base belonging to the armed wing of the Kurdistan Freedom Party, an Iranian Kurdish opposition group based in Iraq’s semiautonomous northern Kurdistan region, came under drone attack. Rebaz Sharifi, commander of the Kurdistan Militia Corps, said the strikes targeted the group’s Chamshar base, without giving details on casualties or damage. No group immediately claimed responsibility. The region keeps absorbing these exchanges, with states and armed formations trading fire while ordinary people get the sirens, the closures and the uncertainty.
Markets Cheer or Panic, Same System
Markets reacted quickly. The dollar rose against most peers as the renewal of hostilities fanned inflation fears and raised prospects for interest rate hikes among global central banks. Against Japan’s currency, the dollar was up 0.2% at 162.075 yen. The euro weakened 0.1% to $1.1397, the British pound slipped 0.2% to $1.3374, the Australian dollar was down 0.3% at $0.6928 and the kiwi eased 0.1% to $0.5757. The U.S. dollar index was up 0.1% at 101.13 after earlier touching its highest level since July 8.
Brent crude futures rose 4.1% to $79.11 a barrel in Asian trade, while another Reuters report said Brent climbed 4.3% to $79.31 a barrel and U.S. crude added 4.4% to $74.62 a barrel. The spike in oil pushed 2-year Treasury yields to their highest since early 2025 at 4.2393%, and Fed fund futures slipped 2 ticks, implying 39 basis points of policy tightening by the end of the year. Fed funds futures were also pricing an implied 50.9% probability of two or more rate hikes by the time of the U.S. central bank’s December meeting, up from a 47.6% chance on Friday, according to the CME Group’s FedWatch tool.
Tony Sycamore, market analyst at IG in Sydney, said, “After the flare-up into the end of last week which continued over the weekend, the dollar has responded, and the crude oil price has been the driver.” He added, “This reinflames concerns that if the energy prices rise from here, we could start to see rate hikes pulled forward.” Thomas Mathews, head of markets for Asia Pacific at Capital Economics in Wellington, said, “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,” and added, “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.”
Asian equities fell. S&P 500 futures dipped 0.6%, Nasdaq futures lost 1.3%, EUROSTOXX 50 futures fell 0.9%, DAX futures declined 1.0% and FTSE futures eased 0.3%. Japan’s Nikkei shed 2.2%, MSCI’s broadest index of Asia-Pacific shares outside Japan sank 1.8%, and South Korea’s KOSPI sank 7.6% after already losing almost 8% last week. South Korean chipmaker SK Hynix’s U.S.-listed shares jumped almost 14% in their Nasdaq debut on Friday, while Apple had sued OpenAI and two former employees for trade secrets theft after markets closed. The financial system does what it always does: turns war into a pricing event.
India’s rupee and government bonds were expected to track Middle East developments alongside inflation data from the U.S. and India. The rupee closed at 95.3250 per dollar on Friday, down 0.1% on the week, and traders said it remained vulnerable to further weakening if the conflict persisted and oil prices rose. In the near term, three traders pegged the rupee in the 95-96 range. Government bonds swung sharply last week as continued purchases by foreign investors were challenged by heavy selling, tracking a fresh jump in oil prices and Treasury yields after the end of a ceasefire between the U.S. and Iran. The 10-year benchmark yield ended at 6.7139% on Friday, recovering from the week’s high of 6.7734%. Traders expected the benchmark yield to move within the 6.65%-6.77% range this week.
The focus in India and the U.S. was also on inflation data. India’s June retail inflation was due Monday at 4:00 p.m. IST, with Reuters polling economists for 4.30%, and June wholesale inflation was due Tuesday at 12:00 p.m. IST, with a Reuters poll at 9.15%. U.S. June consumer price and core inflation were due Tuesday at 6:00 p.m. IST, with Reuters polling for 3.8%, followed by June PPI machine manufacturing on Wednesday, initial weekly jobless claims for the week to July 11 and the July Philly Fed Business index on Thursday, and June retail sales, June housing starts, June import prices, June industrial production and July U-Mich sentiment prelim on Friday. Westpac analysts wrote that inflation risks would remain in focus with U.S. CPI data on Tuesday, PPI gauges the following day and Fed Chair Kevin Warsh’s testimony before the House and Senate. The Bank of Japan may revise up its economic growth forecast for fiscal 2026 and keep its focus on the risk of an inflation overshoot as rising costs from a weak yen and strong AI demand offset some of the declines in oil prices, three sources familiar with the central bank’s thinking told Reuters.
In India, economists polled by Reuters expected June CPI to breach the central bank’s medium-term target of 4% for the first time in 16 months, while year-on-year core U.S. CPI was forecast at 2.9%. MUFG said in a note, “Unless US inflation slows materially enough to shift Fed expectations, any Asia FX rally may still prove short-lived. Conversely, another upside inflation surprise would likely reinforce the market’s bullish USD bias and keep pressure on most regional currencies.” Traders also watched foreign portfolio flows linked to a large domestic IPO as a factor for the rupee’s momentum this week. Foreign investors had net bought over $4.1 billion of bonds in the last six weeks, starting June 1, under the Fully Accessible Route, and those notes were part of three emerging market debt indexes. Traders were also paring expectations that the RBI would hike rates significantly this year. Lavanya Venkateswaran, executive director and senior ASEAN and India economist at OCBC Bank, said, “We are looking for a shallow rate hiking cycle from the RBI of a cumulative 50 bps in FY27, but these hikes will likely come in late 2026 and early 2027.”