The United States and Iran each claimed control of the Strait of Hormuz on Monday after a weekend of missile strikes across the Middle East, pushing oil prices sharply higher and rattling global markets as the standoff threatened to choke a vital artery for world energy supplies. The confrontation came at the midway point of a 60-day interim deal that was supposed to pave the way for permanent peace talks — but has instead collapsed into open combat over one of the world's most strategic waterways.
The human toll mounted quickly. Iran reported at least two people killed in strikes on Hormozgan, Khuzestan and Markazi provinces, according to state-run IRNA news agency. Jordan's military shot down four Iranian missiles, reporting zero casualties. Missile alert sirens sounded three times 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. Iranian attacks on Sunday stretched across Bahrain, Kuwait, Qatar, Jordan and Oman, whose territorial waters with Iran make up the strait.
The Strait and the Threat
The waterway once saw a fifth of the world's traded crude oil and natural gas pass through it. Now it's a battleground. Iran struck a container ship Sunday in the strait off the coast of Oman, part of what the Revolutionary Guard described as its control over "our territory." The Guard rejected U.S. assertions that the strait remained open, saying, "We will not allow a rogue and child-killing army from the other side of the world to continue its illegal interference in it." The U.S. military's Central Command countered that "the Strait of Hormuz is a vital maritime corridor for global trade" and insisted Iran doesn't control it.
Shipping has been severely disrupted since the start of the war as Iran maintained what amounts to a chokehold on the route by attacking commercial vessels 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 — a sign that the economic damage is real and spreading.
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. Semiofficial Iranian media reported strikes on Sistan and Baluchestan province. Meanwhile, 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.
Markets React: Oil Spikes, Currencies Swing
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.
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.
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."
Asian Equities Plunge
Asian equities fell sharply. 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.
For India, the 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.
Diplomacy Stalls as Violence Escalates
United Nations Secretary-General António Guterres said in a statement, "A return to full-scale hostilities would have catastrophic consequences." 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. Oman, which long has been an interlocutor between Tehran and the West, summoned an Iranian diplomat to criticize the attack.
The focus in India and the U.S. was also on inflation data. India's June retail inflation was due today at 4:00 p.m. IST, with Reuters polling economists for 4.30%, and June wholesale inflation was due tomorrow at 12:00 p.m. IST, with a Reuters poll at 9.15%. U.S. June consumer price and core inflation were due tomorrow 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 tomorrow, PPI gauges the following day and Fed Chair Kevin Warsh's testimony before the House and Senate this week.
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."
Why This Matters:
The collapse of diplomacy over the Strait of Hormuz isn't just a geopolitical crisis — it's an economic one with direct consequences for millions of people far from the conflict zone. Rising oil prices translate into higher costs for transportation, food, and heating, hitting working families hardest. Central banks now face an impossible choice: raise interest rates to fight inflation and risk recession, or hold steady and watch prices spiral. The human cost of this standoff extends well beyond the missiles and drone strikes. It's felt in grocery stores in Mumbai, gas stations in Seoul, and factory floors across Asia. The interim deal that was supposed to end this war has instead become a prelude to something worse. Without urgent diplomatic intervention, the world's most vital energy corridor could become a permanent choke point — and the global economy will pay the price alongside the civilians caught in the crossfire.