The US and Iran found themselves back on a war footing on Wednesday after the most significant exchange of fire in weeks.

The greenback tends to benefit from higher oil prices because the US economy is less exposed to energy shocks than many other major economies, attracting demand at the expense of currencies such as the euro and yen.

While most economists expect the European Central Bank to be near the end of its tightening cycle after next week's widely anticipated rate hike, the Federal Reserve is confronting a growing risk of having to tighten policy in 2027.

“We expect the ECB to finish its hiking cycle by the end of the year, while the Federal Reserve will likely be just beginning to raise rates,” George Brown, senior economist at Schroders, said.

“That should widen rate differentials in favour of the dollar and lead to a weaker euro by year,” he added, flagging Schroders is positioned for a weaker euro and expects the single currency to fall to $1.10 against the dollar by year-end.

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However, a selloff in US Treasuries driven by concerns about inflation and the country's fiscal trajectory can weigh on the dollar, as rising debt levels and persistent price pressures raise doubts about the long-term appeal of US assets.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.11 percent to 99.76, after reaching 99.808, its highest point since August 17. The euro was down 0.16 percent at $1.1575, after hitting $1.1570, its lowest since August 20.

The yield on the benchmark US 10-year note rose to as high as 4.812 percent, its firmest since November 2023, before retreating to 4.804 percent. US/Japan's benchmark 10-year yield extended its rally to 3.01 percent on Wednesday after reaching a three-decade milestone of 3 percent on Tuesday.

Markets are now pricing in a 70 percent chance of a September Fed hike, up from around 40 percent a week earlier, according to CME Group's FedWatch tool.

The Japanese yen rose 0.45 percent against the greenback to 159.50 per dollar, after weakening to its lowest since July 31. It was right above the psychologically important 160-per-dollar threshold as markets weigh the Bank of Japan's rate path.

BOJ governor Kazuo Ueda said consecutive rate hikes could be a possibility. 

US Treasury Secretary Scott Bessent voiced strong support for "decisive" monetary steps to combat yen weakness in a meeting with BOJ Governor Kazuo Ueda, the Treasury Department said.

Markets across Asia were down, with tech firms -- which rely on low borrowing rates to fuel their investments -- battering Tokyo 3.9 percent and Seoul four percent.

Hong Kong, Shanghai, Sydney, Taipei, Mumbai, Bangkok, Jakarta and Manila were also down.

London, Frankfurt and Paris fell in the morning.

The selling followed losses across all three main indexes on Wall Street.

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