A jump in oil prices unnerved investors and sent global bond yields back towards multi-year highs, with Brent crude LCOc1 up 3% to $108 a barrel.
Houthi strikes on the world's biggest exporter Saudi Arabia, which came after the kingdom shut down its main pipeline for bypassing the Strait of Hormuz, added to concerns about energy supplies.
Diplomacy over the U.S.-Israeli war on Iran appeared to falter, with a meeting between Tehran and other Gulf governments postponed. Attacks on ships in the region compounded supply worries.
"Gulf developments remain concerning, and some AI-related headlines are further weighing on equities — an environment where the dollar should remain supported," said Francesco Pesole, currency strategist at ING.
The key question for markets this week is whether the U.S. Fed will hike interest rates on Wednesday in response to the jump in energy prices that has pushed diesel to record highs and helped lift underlying inflation by more than expected in August.
Money markets on Monday pointed to a roughly 90% chance of a rate hike, up from around 60% a week ago, according to CME Group's FedWatch tool.
"The U.S. dollar has strengthened modestly at the start of this week, encouraged by building expectations that the Fed will begin tightening monetary policy," said Lee Hardman, senior currency analyst at MUFG.
Still, the dollar's recent firmness was not without risks.
"An unchanged decision from the Fed would be a shock for markets and a clear negative for the USD," Scotiabank analysts led by Shaun Osborne said in a note.
"But a 'dovish' hike which does not obviously commit to additional moves would also likely weigh on the USD," they wrote.
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