Dollar slips as labor market remains stable, US-Iran tensions flare
Market Overview and Economic Impacts
By Chuck Mikolajczak
NEW YORK, July 9 (Reuters) - The dollar dipped for a second straight session on Thursday as the U.S. and Iran carried out renewed attacks, while a stable reading on the labor market kept investor attention on potential inflation pressures.
US-Iran Tensions and Global Market Response
Iranian armed forces launched attacks on U.S. military infrastructure in neighbouring Gulf states following U.S. strikes on Iran's southern coastal and eastern provinces, further straining a three-week-old ceasefire agreement.
Oil Prices and Inflation Concerns
Oil prices eased from earlier highs, however, with U.S. crude last down 2.65% to $71.57 a barrel and Brent at $75.72 per barrel, down 2.95% on the day, as concerns about higher inflation denting global growth outweighed supply worries.
Currency Movements and Market Sentiment
The dollar index, which measures the greenback against a basket of currencies, shed 0.15% to 100.87, with the euro up 0.19% at $1.1436.
"It's safe to say there's a lot of confusion," said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto. "You could argue the sideways price action, the market is trying to decipher what reality is, but we're going to trade off the tone of the next headline, sadly."
Central Bank Reactions and Policy Outlook
Analysts see the U.S. as more insulated from energy supply shocks compared with other countries, which could force other central banks to hike interest rates at a faster pace than is expected from the Federal Reserve.
Federal Reserve Meeting Insights
The minutes from the Fed's June 16 to 17 meeting, the first under new Fed Chairman Kevin Warsh, showed concern about high inflation mounted among policymakers, and a few participants saw a case to raise interest rates right away.
Rate Hike Expectations Shift
RATE HIKE EXPECTATIONS SHIFT
New York Fed President John Williams said on Thursday that despite the resumption of hostilities in the Middle East, he was not looking for a sustained rise in energy prices over the remainder of the year.
Expectations for a rate hike of at least 25 basis points at the Fed's July 28 to 29 meeting eased back to 26.2% from 31% in the prior session, but up from 18.2% a week ago, according to CME Group's FedWatch tool. For the September 15 to 16 meeting, markets are pricing in a 61.7% chance of a hike, down from the 66.6% on Wednesday but an increase from the 54.1% a week earlier.
European Central Bank and Global Perspectives
European Central Bank policymakers gathering last month were presented with projections showing inflation staying above target into next year despite higher interest rates, accounts of the meeting showed on Thursday.
Labor Market and Currency Updates
On the U.S. economic front, weekly initial jobless claims dipped by 2,000 to 215,000, below the 218,000 estimate of economists polled by Reuters, indicating the labor market remains on stable footing.
Yen and Bank of Japan Developments
Against the Japanese yen, the dollar weakened 0.18% to 162.30. The Bank of Japan said the Iran war is likely to goad more firms to raise prices later this year, signaling caution over mounting inflationary pressures that could bolster the case for further rate hikes.
Japan's government plans to add an explicit reference to Bank of Japan independence in its economic blueprint after concerns over political interference in monetary policy helped push bond yields to multi-decade highs, a source familiar with the matter said.
Sterling Performance
Sterling strengthened 0.23% to $1.3415 after hitting a fresh three-week high of $1.343.
(Reporting by Chuck Mikolajczak; addtional reporting by Amanda Cooper in London and Jiaxing Li in Hong Kong; Editing by Kate Mayberry, Chizu Nomiyama, Paul Simao and Aurora Ellis)