The dollar remained near a two-week high on Wednesday as renewed fighting in the Middle East drove oil prices higher, reviving concerns over inflation and adding pressure that pushed bond yields up.
The dollar index, which measures the U.S. currency against a basket including the yen and euro, rose 0.11% to 99.79, its highest level since August 17. The euro fell 0.13% to $1.1577.
Demand for the U.S. currency as a safe-haven asset was strengthened by rising Treasury yields and growing expectations that the Federal Reserve will raise interest rates, despite recent economic data coming in below forecasts.
The United States launched a barrage of airstrikes on Iran on Tuesday, prompting an Iranian response in the most serious escalation in weeks. Oil prices rose on Wednesday, extending the previous session’s jump, with Brent crude futures up 1.15% at $95.74 a barrel and U.S. West Texas Intermediate crude rising 0.85% to $91.05.
“There is a need to remain vigilant about the situation in the Middle East today,” said Kumiko Ishikawa, a currency analyst at Sony Financial Group.
The New Zealand dollar fell 0.8% against the U.S. currency to $0.5844, its lowest level since August 13, even after the Reserve Bank of New Zealand raised its official interest rate by 25 basis points to 2.75%. Analysts said market participants viewed the decision as less hawkish than expected.
“Compared with what markets had priced in and what they may have expected, the decision does not meet their expectations,” said Imre Speizer, an analyst at Westpac New Zealand.
U.S. job openings for July and an indicator of manufacturing activity for August, released overnight, came in below market expectations. However, money markets increased their expectations for a Federal Reserve rate hike after Chair Kevin Warsh’s speech in Jackson Hole, Wyoming, last week.
The CME Group’s FedWatch tool currently shows markets pricing in a 68% probability of a Federal Reserve rate hike in September, compared with about 40% a week ago.
“With regard to U.S. data, it is worth bearing in mind that the impact of weak figures could be offset by escalating tensions in the Middle East,” Ishikawa said.
Employment and consumer price inflation data for August are due before the Federal Reserve’s September 15-16 meeting. The jobs report due Friday is expected to show employers added 56,000 jobs last month, according to the average estimate of economists surveyed by Reuters.
Federal Reserve Governor Michael Barr said Tuesday that if inflation does not ease quickly, the U.S. central bank will have to raise interest rates.
The benchmark 10-year U.S. Treasury yield rose to 4.81%, its highest level since November 2023. Japan’s benchmark 10-year government bond yield also continued to climb, reaching 3.01% on Wednesday morning after hitting 3% for the first time since 1996 on Tuesday.
Higher yields encourage investors to buy safe-haven currencies such as the dollar, while reducing the appeal of riskier assets such as equities.
Sterling fell 0.09% to $1.3503, while the Australian dollar declined 0.04% to $0.7141.
In cryptocurrency markets, Bitcoin fell 0.24% to $77,242.62, while Ether dropped 0.51% to $2,407.74.
Yen Under Pressure
The Japanese yen fell 0.08% against the dollar to 160.28 per dollar, its lowest level since July 31, remaining above the psychologically important 160-yen threshold despite near-certain expectations that the Bank of Japan will raise interest rates this month.
The U.S. Treasury Department said Secretary Scott Bessent expressed strong support for taking “decisive” monetary steps to address the yen’s weakness during a meeting with Bank of Japan Governor Kazuo Ueda.
Ueda told reporters that he hoped to discuss with the board at this month’s meeting whether the economy was developing in line with its forecasts and whether inflation risks were increasing.
Hajime Takata, a Bank of Japan board member known for his hawkish stance, said Wednesday that the bank should raise interest rates flexibly in response to inflationary pressures.
A rare joint intervention by the United States and Japan in late July provided short-term support for the fragile yen, pulling it away from a 40-year low of 163.99. The currency has since given up about half of the gains made following the coordinated action.
“Another round of actual coordinated intervention appears unlikely until there is some easing in the Strait of Hormuz that relieves pressure on oil prices,” said Tony Sycamore, a market analyst at IG, in a note.
Source: Reuters
