Dollar Steady as Middle East Tensions Boost Oil and Fed Rate Hike Odds
Market Reactions to Middle East Tensions and Federal Reserve Policy
By Satoshi Sugiyama
TOKYO, Sept 2 (Reuters) - The dollar held firm on Wednesday as renewed hostilities in the Middle East pushed oil prices higher and revived inflation concerns.
The currency's safe-haven appeal has been reinforced by rising Treasury yields and growing expectations of a Federal Reserve rate hike, even as recent economic data came in below forecasts.
Middle East Escalation Drives Oil and Dollar
The U.S. launched a barrage of airstrikes on Iran on Tuesday, prompting Iranian retaliation in the most serious escalation in weeks. Oil prices rose nearly 1% in early trade on Wednesday, extending the previous session's surge, with Brent futures up 0.92% at $95.52 a barrel and U.S. West Texas Intermediate (WTI) crude 0.89% firmer at $91.02. [O/R]
"Continued vigilance is needed over the situation in the Middle East today," said Kumiko Ishikawa, a senior FX analyst at Sony Financial Group.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was at 99.67.
U.S. Economic Data and Fed Rate Hike Expectations
July JOLTS job openings and the August ISM manufacturing index released overnight were below market forecasts, but money markets have reinforced expectations of a Federal Reserve rate hike following Fed Chair Kevin Warsh's speech at Jackson Hole last week.
Markets are now pricing in a 67% chance of a September Fed hike, up from around 40% a week earlier, according to CME Group's FedWatch tool.
"As for the U.S. data, it is worth bearing in mind that, if the figures are weak, their impact could be offset by heightened tensions in the Middle East," Ishikawa said.
August's jobs and consumer price inflation data are both due before the Fed's September 15 to 16 meeting. This Friday's jobs report is expected to show that employers added 56,000 jobs last month, according to the median estimate of economists polled by Reuters.
Fed Governor Michael Barr said on Tuesday that if inflation does not cool quickly, it will be time for the U.S. central bank to increase interest rates.
Impact on Treasury Yields and Global Currencies
The yield on benchmark U.S. 10-year notes edged higher to 4.8%, while Japan's benchmark 10-year yield was at 3% Wednesday morning, after reaching the 30-year milestone on Tuesday. Higher yields drive investors to buy safe-haven currencies, including the U.S. dollar, while undermining the case for riskier assets such as equities.
The kiwi dollar was slightly softer at $0.5889 ahead of a Reserve Bank of New Zealand policy decision later in the session, at which the central bank is widely expected to raise interest rates by a quarter point to 2.75%.
The British pound eased 0.04% to $1.3509, while the Australian dollar was steady versus the greenback at $0.7143.
In cryptocurrencies, bitcoin fell 0.07% to $77,376.22. Ethereum lost 0.08% to $2,418.26.
Yen Under Pressure Amid Global Uncertainty
The Japanese yen was little changed against the greenback at 160.21 per dollar, remaining beyond the psychologically important 160-per-dollar level despite overwhelming expectations that the Bank of Japan will raise rates this month.
U.S. Treasury Secretary Scott Bessent voiced strong support for "decisive" monetary steps to combat yen weakness in a meeting with BOJ Governor Kazuo Ueda, the Treasury Department said.
Ueda told reporters he hoped to discuss with his board at this month's meeting whether the economy is moving in line with its forecast, and whether inflation risks were heightening. A hawkish BOJ board member is due to deliver a speech later on Wednesday.
A rare joint intervention from the U.S. and Japan at the end of July provided short-lived relief for the fragile yen, pulling it away from the 40-year lows of 163.99, but the currency has since surrendered around half of the gains from the joint action.
"There appears little chance of another round of actual co-ordinated intervention until there is some de-escalation in the Strait of Hormuz that takes heat out of the oil price," said Tony Sycamore, a market analyst at IG, in a note.
(Reporting by Satoshi Sugiyama; Editing by Jacqueline Wong)
