Dollar softens as investors weigh Middle East jitters against inflation data
Market Reactions to Geopolitical Tensions and Economic Indicators
By Niket Nishant and Jiaxing Li
BENGALURU/HONG KONG, July 21 (Reuters) - The U.S. dollar ticked lower on Tuesday as markets balanced conflicting signals from the Middle East against lingering optimism from softer inflation data last week.
The euro rose 0.09% against the dollar to $1.1424 while the yen declined 0.09% against the dollar to 162.63 yen.
Geopolitical Risks and Safe-Haven Flows
The moves highlight the risks that markets are grappling with as they attempt to price in the latest developments in the Middle East.
The U.S. military has struck Iran for ten straight nights, reigniting tensions and prompting investors to dial back hopes that the conflict would end soon. That kind of escalation typically drives flows into havens such as the dollar.
Diplomatic Efforts and Uncertainty
At the same time, efforts to find a diplomatic solution remain active. A senior Iranian official told Reuters on Monday that Tehran had received a proposal from mediators for a 10-day ceasefire.
The lack of clarity on where the conflict is headed has left the dollar in limbo, with investors lacking conviction to place significant bets.
Inflation Data and Rate Hike Expectations
A murky inflation outlook has added another layer of uncertainty. Benign U.S. inflation data released last week had already taken some wind out of the currency by curbing bets on further rate hikes.
Impact of Oil Prices and Global Trade
However, questions over where prices go from here persist, as the outlook for global inflation hinges on how soon shipping through the Strait of Hormuz returns to normal and oil markets stabilize.
Traders expect at least one rate hike by the Federal Reserve this year, according to data compiled by LSEG.
Brent crude futures dipped 1.1% on Tuesday but have jumped nearly 21% this month.
Analyst Perspectives
"A sustained depreciation of the U.S. dollar looks more like a 2027 story. We expect the dollar to remain firm over the next few months until the inflation picture becomes clearer," said Jimmy Jean, chief economist and strategist at Desjardins.
The U.S. dollar index, which measures the currency against a basket of six peers, dipped 0.05% to 100.9 after hitting its highest since July 15 in the previous session.
The Canadian dollar steadied after dropping to a one-month low, after the U.S. imposed a new tariff of 50% on a wide range of Canadian products in response to what it called Ottawa's "discriminatory treatment" of American-made cars, alcohol and dairy goods.
Pound Readies for Burnham-Healey Era
POUND READIES FOR BURNHAM-HEALEY ERA
The British pound rose 0.1% against the dollar to $1.3441, on course to snap a three-day losing streak.
Political Developments in the UK
Andy Burnham became Britain's seventh prime minister in a decade on Monday, and reiterated his commitment to stick to the previous government's fiscal rules. John Healey, the former defence secretary, was appointed the new finance minister.
Burnham has yet to set out details on how he intends to meet his objectives while sticking to election pledges of not raising taxes on working people.
Fiscal Outlook and Market Sentiment
"The greatest near-term risk lies with the UK's fiscal outlook and Burnham's plans around the prior government's self-imposed fiscal rules," Scotiabank's chief FX strategist Shaun Osborne wrote.
Upcoming Central Bank Decisions
Markets are readying for a European Central Bank meeting later this week. Economists polled by Reuters expect the central bank to hold interest rates steady but still hike at least once more later this year.
(Reporting by Niket Nishant in Bengaluru and Jiaxing Li in Hong Kong; Editing by Shri Navaratnam, Lincoln Feast and Mrigank Dhaniwala)
