Dollar retreats as traders focus on Iran, Fed policy
Market Reactions to Geopolitical Tensions and Federal Reserve Policy
By Karen Brettell
Dollar Movement Amid Iran War Developments
NEW YORK, May 18 (Reuters) - The dollar dipped against most major currencies on Monday as traders evaluated whether progress in ending the Iran war is likely in the near-term and whether central bankers will need to tighten policy if oil prices remain elevated.
Oil Prices and Sanctions Impact
Oil prices edged up about 2% to a two-week high in volatile trade on Monday as worries over supply disruption from the Iran war offset a report the U.S. had agreed to waive sanctions on Iranian crude during talks.
Federal Reserve Policy and Market Expectations
The dollar gained last week as a Treasury yields rose sharply on fears that energy costs will feed through to consumer price inflation and lead to a Federal Reserve rate hike.
Shifting Expectations for Rate Hikes
"Although expectations regarding the Fed had shifted significantly towards a more restrictive monetary policy from the outset, market participants were still reluctant to bet on interest rate hikes. This changed last week, with expectations regarding the Fed shifting most markedly among the G10," said Commerzbank strategist Michael Pfister.
New Fed Chair and Inflation Concerns
Some of the market moves are also likely due to investors testing whether Kevin Warsh, the newly appointed Fed chair, will react to higher inflation if needed, said Lou Brien, market strategist at DRW Trading. "They're going to want to see that Warsh is his own man rather than the president's man at the Fed."
Warsh has argued there is room to lower rates, though persistent inflation - driven in part by the war in the Middle East - could frustrate those hopes. Markets are pricing in a 51% chance that the Fed will raise rates by December.
Currency Performance Overview
The euro was last up 0.09% at $1.1636 and sterling strengthened 0.66% to $1.3409.
The dollar index, which tracks the U.S. currency against six others, dipped 0.14% to 99.13, having posted its strongest weekly performance in three months last week.
Japanese Yen and Government Response
The Japanese yen weakened 0.14% against the greenback to 158.99 per dollar, its weakest since April 30.
Japanese officials intervened several times in late April and into early May, which helped the yen to strengthen, though the currency has since surrendered much of those gains.
Japan's government is likely to issue debt as part of funding for a planned extra budget to try to limit the economic impact of the Middle East war, a government source with direct knowledge of the deliberations told Reuters on Monday.
(Additional reporting by Jiaxing Li in Hong Kong and Amanda Cooper in London; Editing by Susan Fenton, Chizu Nomiyama, Barbara Lewis and Cynthia Osterman)
