The dollar is set for its strongest two-day rally in almost a year as the escalating conflict in Iran fuels inflation expectations and drives demand for safe-haven assets. The Bloomberg Dollar Spot Index advanced 0.8% on Tuesday, putting it on track for its biggest back-to-back gain since April 2024. The 10-year Treasury yield rose seven basis points to a three-week high.

Widening Middle East tensions are pushing energy prices higher, with crude oil surpassing $85 per barrel for the first time since July 2024. European natural gas prices jumped more than 40% to levels not seen since 2023. These developments have traders reducing expectations for Federal Reserve interest rate cuts this year, with money markets now pricing only 37 basis points of reductions.

Options markets reflect the dollar's strengthening position, with traders now needing to pay to hedge against a broad dollar rally – a stark contrast to recent uncertainty. Dollar sentiment over short time frames hasn't been this bullish since June, as most G-10 currencies fell by 1% or more on Tuesday, with institutional investors trimming positions in the euro and pound.