Dollar Steady as Middle East Strikes Lift Oil, Revive Inflation Worries
US-Iran tensions lift oil prices, boosting the dollar's safe-haven appeal. Markets eye Fed hike odds, RBNZ decision, and yen weakness.
The US dollar held its ground on Wednesday as escalating hostilities in the Middle East drove oil prices higher, reviving concerns about inflation and reinforcing the currency's safe-haven appeal. The greenback's strength was also supported by rising Treasury yields and growing market expectations of a Federal Reserve rate hike, even as recent US economic data came in softer than forecast.
US airstrikes on Iran on Tuesday drew retaliatory action, marking the most serious escalation in the region in weeks. Oil prices extended their gains in early trade, with Brent crude climbing 0.92% to $95.52 a barrel and US West Texas Intermediate rising 0.89% to $91.02. The dollar index, which measures the currency against a basket of peers, stood at 99.67.
"Continued vigilance is needed over the situation in the Middle East today," said Kumiko Ishikawa, a senior FX analyst at Sony Financial Group. She noted that weak US data could be offset by heightened regional tensions.
Overnight releases of July JOLTS job openings and the August ISM manufacturing index both missed market forecasts. However, money markets have strengthened expectations of a September Fed hike following Chair Kevin Warsh's speech at Jackson Hole last week. According to CME Group's FedWatch tool, markets now price in a 67% chance of a rate increase, up from roughly 40% a week earlier.
Fed Governor Michael Barr said on Tuesday that if inflation does not cool quickly, it will be time for the central bank to raise interest rates. The yield on benchmark US 10-year notes edged higher to 4.8%, while Japan's 10-year yield stood at 3% after reaching a 30-year milestone on Tuesday. Higher yields typically attract investors to safe-haven currencies like the dollar.
Ahead of the Fed's September 15-16 meeting, August jobs and consumer price inflation data are due. Friday's jobs report is expected to show employers added 56,000 jobs last month, according to the median estimate of economists polled.
Elsewhere, the New Zealand dollar was slightly softer at $0.5889 ahead of the Reserve Bank of New Zealand's policy decision, where a quarter-point rate hike to 2.75% is widely expected. The British pound eased 0.04% to $1.3509, while the Australian dollar held steady at $0.7143. In cryptocurrencies, bitcoin slipped 0.07% to $77,376.22, and ethereum lost 0.08% to $2,418.26.
The Japanese yen remained under pressure, trading little changed at 160.21 per dollar, staying beyond the psychologically important 160 level despite overwhelming expectations that the Bank of Japan will raise rates this month. US Treasury Secretary Scott Bessent voiced strong support for "decisive" monetary steps to combat yen weakness in a meeting with BOJ Governor Kazuo Ueda. Ueda said he hoped to discuss at this month's meeting whether the economy is moving in line with its forecast and whether inflation risks are heightening.
A rare joint US-Japan intervention in late July provided short-lived relief for the yen, pulling it away from 40-year lows of 163.99, but the currency has since surrendered about half of those gains. Analysts suggest another round of coordinated intervention appears unlikely until there is some de-escalation in the Strait of Hormuz that takes heat out of oil prices.