The US dollar climbed to its highest level in six weeks on Wednesday, as investors increasingly believed that interest rates may need to rise to counter inflation driven by the war with Iran.

Uncertainty over when the conflict may end has intensified inflation concerns and triggered a broad selloff across global bond markets, pushing the yield on 30-year US Treasury bonds to its highest level since 2007.

US President Donald Trump said the United States may have to launch another strike against Iran, though he also indicated that Tehran wants to reach an agreement to end the war, which has effectively shut down the vital Strait of Hormuz, sharply lifting energy prices and unsettling global markets.

The US Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.1% to its highest level since April 7 at 99.47 points. The index has gained more than 1.3% during May, supported by safe-haven demand and growing market pricing for a Federal Reserve rate hike before year-end.

Meanwhile, the euro fell to a six-week low of $1.158, down 0.16%, while the British pound declined 0.07% to $1.338, near the six-week low reached earlier this week.

The Australian dollar, often viewed as a proxy for global risk appetite, was little changed at $0.711 after dropping 0.9% on Tuesday.

Data from CMEs FedWatch Tool showed traders are now pricing in more than a 50% probability that the Federal Reserve will raise interest rates by December, marking a sharp reversal from pre-war expectations that had pointed to two rate cuts.

Investors are now awaiting the release of the latest Federal Reserve meeting minutes later today for additional clues on the outlook for monetary policy.

Analysts said rising US Treasury yields have been the main driver behind the dollars strength.

There is room for yields to move higher, said Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.

He added: While we still believe the Fed will tighten at a slower pace than many other G10 central banks, market pricing remains relatively low at this stage, especially with the risk of another spike in crude oil prices increasing.

Brent crude futures fell 1.1% to around $110 per barrel, but prices remain more than 50% higher than levels seen in late February before the war began.

Renewed concerns over the Japanese yen

The dollars rally pushed the Japanese yen back toward the 160 yen-per-dollar level, the threshold that prompted Japanese authorities to intervene in currency markets last month for the first time in nearly two years.

Tokyo intervened several times in late April and early May to slow the yens decline, according to Reuters sources, though the impact of those interventions proved short-lived.

The yen was last trading at 159.01 per dollar, as investors digested comments from US Treasury Secretary Scott Bessent.

Bessent told Reuters on Tuesday that he was confident Bank of Japan Governor Kazuo Ueda would do what is necessary if granted sufficient independence from the Japanese government, signaling Washingtons desire to see further rate hikes from the BOJ.

In the near term, excessive volatility remains the key factor, while the 160161 level continues to be the line markets are watching, said Christopher Wong, currency strategist at OCBC Bank.

He added: Intervention risks may make markets more cautious about continuing to buy dollar-yen, but unless US Treasury yields and the broader dollar weaken, any official action would likely only slow the rally temporarily rather than reverse the trend entirely.