Dollar rises with Iran conflict, US rate outlook in focus

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Dollar rises with Iran conflict, US rate outlook in focus.

foreign exchange :: 4hrs ago :: source - reuters

By Stefano Rebaudo

(Reuters) - The U.S. dollar was higher on Thursday, just off its strongest level since early April touched in Asian trading hours, as doubts grew over prospects of a deal to reopen the Strait of Hormuz and focus ‌shifted to possible U.S. interest rate hikes.

Iran's Revolutionary Guard targeted a U.S. airbase on Thursday according to an Iranian media report, ‌hours after U.S. President Donald Trump rejected a report he was close to a compromise deal with Tehran.

The dollar surged in March after Iran's effective closure of the Strait of Hormuz sent oil prices soaring, hitting importers such as Japan and the euro zone and boosting safe-haven demand for the greenback. It fell after Trump announced a two-week ceasefire on April 7, before recovering in May on growing doubts about a lasting deal.

Investors are also assessing the Federal Reserve's interest rate outlook ahead of economic data later in the session.

"Given that statements from FOMC members have become increasingly hawkish in recent days and weeks, which is certainly one ‌of the key reasons for the shift in ⁠market expectations towards interest rate hikes, it will be decisive whether the figures support these expectations," Commerzbank rate strategist Michael Pfister said.

Governor Christopher Waller said last Friday that the Fed should axe the "easing bias" from its policy statement ⁠and effectively open the door to a possible rate hike.

ING analysts recently said the hawkish Fed narrative is likely to dominate in the coming weeks, warning the euro may struggle to hold above the $1.1650–$1.1660 range.

The single currency was down 0.16% at $1.1607.

Markets will now turn to the Fed's preferred inflation gauge, the core PCE deflator, due later in the day.

Oil prices rose more than 2% on Thursday after dropping over 5% the previous day, as Iran's Revolutionary Guards said ‌they targeted a U.S. airbase in response to a U.S. attack in the port city of Bandar Abbas.

The dollar index, a gauge of the greenback's value relative to a basket of major foreign currencies, was up 0.18% at 99.39, after touching 99.546 in Asian trade, its highest since April 7.

Analysts at Barclays said that geopolitical tensions and resilient risk sentiment could dampen the usual boost the dollar gets from Fed hikes, as safe-haven demand would fade when the Iran conflict eases.

"The Fed might move toward fulfilling Kevin Warsh's 'dovish' inclinations more readily without a war to drive U.S. inflation expectations ‌even higher," Thierry Wizman, global forex and rates strategist at Macquarie Group, said, referring to the impact of a durable 'peace' deal.

Hours after Warsh was sworn in at a White House ceremony, Trump said he expected rates to come down.

YEN STEADY, INTERVENTION IN FOCUS

Analysts said a sharp rebound in the yen from current weak levels is unlikely, with a ‌June Bank of Japan rate hike largely priced in. The threat of official intervention could limit losses past 160 per dollar.

The dollar was little changed against the yen at 159.43.

U.S. data will remain key, as a more hawkish Fed could limit any pullback in dollar-yen, with short-term U.S.-Japan yield spreads still the main driver.

The risk-sensitive Australian dollar fell 0.35% to $0.7115, a one-week low, while the New Zealand dollar dipped ‌0.2% to $0.5888 after rising 1.11% in the previous session.

The kiwi dollar was the top-performing G10 currency on Wednesday after the Reserve Bank of New Zealand signalled the need for earlier and potentially more aggressive rate hikes to counter the global energy shock.

(Reporting by Stefano Rebaudo. Editing by Muralikumar Anantharaman, Mark Potter and Ronojoy Mazumdar)

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