Dollar Rises to Six-Week High Amid Fed Rate-Hike Bets and Iran Conflict Fears
Market Reactions and Currency Movements
By Ankur Banerjee
Dollar Strengthens on Fed Rate-Hike Expectations
SINGAPORE, May 20 (Reuters) - The U.S. dollar was steady near a six-week high on Wednesday as investors come to terms with the possible need for higher interest rates to tackle inflation due to the Iran war, pushing the Japanese yen back into the intervention zone.
Impact of Middle East Conflict on Global Markets
The uncertainty over when the Middle East war may end has weighed on sentiment, fanned inflation fears and triggered a global bond selloff, with the yield on the U.S. 30-year Treasury bond hitting its highest level since 2007. [US/]
President Donald Trump said the United States may need to strike Iran again but suggested Iran wants a deal to end the war that has roiled markets and sent energy prices soaring.
Performance of Major Currencies
Euro and British Pound
The euro last bought $1.1608, having touched its lowest level since April 8 in the previous session. The British pound was at $1.3398, not far from a six-week low it touched earlier this week.
Australian and New Zealand Dollars
The Australian dollar, often seen as a barometer for risk sentiment, was 0.14% lower at $0.7097, while the New Zealand dollar fell 0.24% at $0.5822.
Dollar Index and Safe-Haven Demand
Against a basket of currencies, the dollar was steady at 99.306. The index is up more than 1% in May due to safe-haven demand and markets pricing in chances of the Federal Reserve hiking interest rates by the end of the year.
Federal Reserve Outlook and Market Expectations
Rate Hike Probabilities
Traders are now pricing in an over 50% chance of a hike in December, CME FedWatch showed, in a sharp reversal from two rate cuts expected before the war. Investor focus will be on the minutes of the Fed's last meeting due later in the day.
Analyst Insights
Carol Kong, currency strategist at Commonwealth Bank of Australia, expects the minutes to be hawkish, pushing the dollar up further, noting that more Fed policymakers have warned about high U.S. inflation since the last Fed meeting in April.
"We continue to expect the FOMC to start a tightening cycle in December," Kong said.
Geopolitical Tensions and Commodity Markets
Strait of Hormuz and Oil Prices
The fragile ceasefire agreed in April has mostly held, although markets remain worried as the Strait of Hormuz - a key route for global supplies of oil and other commodities - is still effectively closed.
Brent crude futures were at $110.8 per barrel in early trading, well above the levels before the war started at the end of February.
Yen Intervention and Japanese Market Response
Recent Yen Movements
The dollar's rise has pushed the yen back near the 160-per-dollar level that led to Japanese officials last month launching their first currency market intervention in nearly two years.
Japanese Government Actions
Tokyo had stepped in to stem the yen's slide in several bouts of intervention at the end of April and early May, sources told Reuters, but the yen's strength did not last long. It was last at 159.03 per U.S. dollar, its weakest level since April 30.
Expert Commentary on Yen Volatility
"Near term, excessive volatility is key while 160/161 remains the line to watch," said Christopher Wong, currency strategist at OCBC.
"Intervention risk should make markets more cautious about chasing dollar/yen higher, but unless U.S. Treasury yields and the broad USD soften, official action may only temporarily slow the move rather than reverse it," he said.
(Reporting by Ankur Banerjee in Singapore; Editing by Jamie Freed)