Inflation fears and Iran uncertainty lift the dollar
By Karen Brettell
Dollar Strengthens Amid Inflation Concerns and Geopolitical Tensions
May 19 (Reuters) - The U.S. dollar hit a six-week high against the euro on Tuesday as investors focused on a possible hawkish shift by the Federal Reserve to curb energy-driven inflation, while uncertainty over a potential peace deal in the Middle East also weighed on sentiment.
Geopolitical Factors Impacting the Dollar
President Donald Trump said on Tuesday the U.S. may need to strike Iran again and that he had been an hour away from ordering an attack before postponing it.
Strait of Hormuz and Oil Prices
The dollar surged in March after Iran's effective closure of the Strait of Hormuz pushed oil prices higher, weighing on oil-dependent economies such as Japan and the euro zone while boosting safe-haven demand for the U.S. currency.
Oil prices fell on Tuesday.
Federal Reserve Policy and Inflation Fears
The greenback is now also being supported by higher yields, driven by inflation fears and uncertainty over how new Federal Reserve Chair Kevin Warsh will respond if price pressures continue to accelerate.
Market Expectations for the Fed
“We're now back to fundamentals, which is, what's going on with inflation and what does that mean for bonds and where does that leave the Fed,” said Eric Theoret, a foreign exchange strategist at Scotiabank.
At the same time, traders are pricing in less aggressive monetary tightening in Europe and Britain, which is also boosting the dollar, Theoret said.
Dollar Index and Treasury Yields
The dollar index, which measures the greenback against a basket of currencies, including the yen and the euro, rose 0.34% to 99.30.
A selloff in U.S. Treasuries extended on Tuesday with yields on 30-year bonds reaching the highest since 2007.
Fed funds futures traders are pricing in roughly 50% odds that the U.S. central bank could hike rates by December although many analysts said a rate increase is unlikely unless inflation is seen in core consumer prices and inflation expectations break higher.
A Reuters poll shows that economists have largely pushed long-held calls for reductions into next year on hopes the current inflation flare-up is temporary.
The euro fell 0.41% to $1.1607. Sterling weakened 0.25% to $1.3399.
Yen Near Intervention Zone
The Japanese yen dipped 0.13% against the greenback to 159 per dollar.
Japanese Economic Growth and Policy Response
Data on Tuesday showed that Japan's economy grew faster than expected in the first quarter, supporting expectations for a Bank of Japan rate increase in June.
Markets are also awaiting details of the government's supplementary budget plan, which could further strain Japan's already deteriorating public finances and weigh on the yen.
Japanese Finance Minister Satsuki Katayama told reporters on Monday that Japan stands ready to act against excessive currency volatility, while ensuring that any intervention to support the yen does not push up U.S. Treasury yields.
Currency Intervention and Market Reaction
Investors have been watching closely for further signs of intervention to support the yen, which remains slightly stronger than it was before Japanese officials last month launched their first foray into the currency market in nearly two years.
(Reporting by Karen Brettell; Additional reporting by Stefano Rebaudo; Editing by Jamie Freed, Sonali Desai, Gus Trompiz and Aurora Ellis)
