The U.S. dollar is strengthening as renewed Middle East tensions push oil prices higher and increase inflation concerns, while rising Treasury yields are adding to the appeal of dollar-denominated assets. The dollar index was 101.7 as of Oct. 1, 2026, putting it on track for a 2% monthly gain, its strongest monthly advance since June.
Higher energy prices could keep inflation elevated, while resilient U.S. economic activity may give the Federal Reserve less room to ease policy. Against this backdrop, several ETFs tied to the dollar, energy, Treasury yields and Japan's currency could remain in focus.
Dollar Currency Gains Momentum
The U.S. dollar remained elevated near a three-month high in late September, supported by higher Treasury yields, elevated oil prices and expectations of tighter U.S. monetary policy.
The greenback had gained momentum as the Federal Reserve raised its benchmark interest rate by 25 basis points to 3.75-4% on Sept. 16, per Federal Reserve Board-Home, while geopolitical tensions and higher energy prices kept inflation concerns in focus.
Fed Policy Becomes Prominent Driver
Markets are also turning toward upcoming U.S. economic data for clues about the Federal Reserve's next moves. The PCE inflation index and non-farm payrolls are among the key releases that could influence expectations for the Fed's next policy move.
This is because the PCE price index inched up 0.3% in August, while annual PCE inflation held at 3.4%, still well above the Fed's 2% target, implying continued hawkish policy in the near future.
The prospect of further rate increases has important implications. Higher interest rates generally support the dollar by increasing the relative yield available on U.S. assets.
Oil Shock Supports Dollar
Oil prices have become a key driver of the latest market moves. Brent crude climbed above $100 a barrel after President Donald Trump rejected an Iranian proposal aimed at resolving the conflict and reopening the Strait of Hormuz. WTI crude is around $92 a barrel as of Oct. 1, 2026.
The geopolitical premium in oil is particularly important for markets because disruptions around the Strait of Hormuz can affect global energy supplies. Flows through the Strait of Hormuz were expected to reach 7.4 million barrels per day this month, per Reuters, as quoted on Yahoo Finance.
However, elevated energy costs can simultaneously increase inflation pressures and weigh on consumers and energy-intensive industries.
Higher energy prices can add to inflation pressures by increasing transportation and production costs. That, in turn, could keep U.S. interest rates higher for longer if inflation remains elevated.
ETFs in Focus
Higher oil prices and expectations of tighter Fed policy are supporting the dollar, whereas elevated crude prices indirectly keep energy ETFs in focus.
Dollar ETFs
The near-term outlook for the greenback remains bullish as markets anticipate a relatively hawkish Federal Reserve policy stance ahead.
Higher interest rates could support the demand for the dollar by making U.S. assets more attractive to global investors. This brings dollar ETFs into the spotlight.
Invesco DB US Dollar Index Bullish Fund UUP is designed to provide exposure to the U.S. dollar against a basket of major developed-market currencies.
It has assets under management of $430.30 million, along with an expense ratio of 0.70%. The fund trades at a three-month average volume of 1.71 million shares.
WisdomTree Bloomberg U.S. Dollar Bullish Fund USDUis an ETF designed to gain exposure to the U.S. dollar against a broad basket of developed and emerging-market currencies.
It has assets under management of $278.20 million, along with an expense ratio of 0.50%. The fund trades at a three-month average volume of nearly 400,000 shares.
Energy ETFs
Higher crude prices can support energy producers and oil exploration and production companies, potentially benefiting upstream-focused funds as geopolitical risks raise supply concerns and thus bring energy ETFs into prominence.
VanEck Oil Services ETF OIH is an energy ETF that invests in oil-related companies.
It has assets under management of $1.90 billion, along with an expense ratio of 0.35%. The fund trades at a three-month average volume of 270,00 shares.
Energy Select Sector SPDR Fund XLE invests primarily in leading U.S. oil and gas companies.
It has nearly $40 billion in assets under management and a 0.08% expense ratio. The fund is trading a massive three-month average volume of 30 million shares.
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Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU): ETF Research Reports
State Street Energy Select Sector SPDR ETF (XLE): ETF Research Reports
VanEck Oil Services ETF (OIH): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).