Dollar advances as Mideast worries rise and as Powell flags inflation risks

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Dollar advances as Mideast worries rise and as Powell flags inflation risks.

foreign exchange :: 11hrs ago :: source - reuters

By Ankur Banerjee

(Reuters) -The dollar firmed on Thursday, buoyed by safe-haven demand due to the looming threat of a broader conflict in the Middle East and possible U.S. involvement, while investors weighed Federal Reserve Chair Jerome Powell's cautionary tone on inflation.

After a muted start in Asia hours, the dollar advanced across the board, weighing heavily on risk sensitive currencies after a report said U.S. officials are preparing for the possibility of a strike on Iran in the coming days.

The Australian dollar fell as much as 0.5% but was last down 0.3% at $0.6489, while the New Zealand dollar slipped 0.5% to $0.5998. Emerging market currencies also struggled, with the South Korean won 1% weaker.

Rapidly rising geopolitical tensions have led to the dollar swiftly reclaiming its safe-haven status, making inroads against the yen, euro and the Swiss franc.

Iran and Israel traded further air attacks on Thursday, with the conflict entering its seventh day. Concerns over potential U.S. involvement have also grown, as President Donald Trump kept the world guessing about whether the United States will join Israel's bombardment of Iranian nuclear sites.

The conflict has heightened fears of broader regional instability, compounded by the spillover effects of the Gaza war.

Some analysts said investors were looking to cover their short-dollar positions.

"The dollar seems ripe for a short-covering rally - especially if the U.S. wades into the Middle East conflict," said Matt Simpson, a senior analyst at City Index.

Geopolitical concerns appear to have overshadowed the FOMC outcome, according to Christopher Wong, currency strategist at OCBC. "Risk aversion dominates sentiments, and that puts pressure on risk-sensitive FX."

U.S. markets are closed on Thursday for the federal Juneteenth holiday, leading to lower liquidity.

The euro hit a one-week low and was last 0.25% weaker at $1.1455, heading for 0.8% drop on the week, its biggest weekly decline since February. The yen last fetched 145.13 per dollar.

The dollar index, which measures the currency against six other units, rose 0.11% to 99 and was set for about a 0.9% gain for the week, its strongest weekly performance since late January.

POWELL'S WARNING

In a widely expected move, the Fed held rates steady, with policymakers signalling they still expect to cut rates by half a percentage point this year, although not all of them agreed on a need for rate cuts.

Powell said goods price inflation will pick up over the course of the summer as Trump's tariffs start to impact consumers.

"Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer," Powell told a press conference on Wednesday. "We know that because that's what businesses say. That's what the data say from the past."

The comments from Powell underscore the challenge facing policymakers as they navigate uncertainties from tariffs and geopolitical risks, leaving markets anxious about the path of U.S. interest rates.

Still, traders are pricing in at least two rate cuts this year though analysts are unsure of the starting point.

"The market is anticipating two 25 bp rate cuts this year, most probably September and December, but, we think the September FOMC will come too soon for the Fed to be comfortable cutting rates," ING economists said in a note.

Ray Sharma-Ong, head of multi-asset investment solutions – Southeast Asia, at Aberdeen Investments, said the Fed may ultimately deliver only one cut — or none at all — this year, given the uncertainties around trade policy and the economic outlook.

Sterling was 0.14% lower at $1.3403 ahead of a policy decision from the Bank of England, where the central bank is expected to stand pat.

The Swiss franc last fetched 0.81995 per dollar ahead of a policy decision from the Swiss National Bank. Norges Bank is also expected to deliver its policy decision later in the day.

(Reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong and Muralikumar Anantharaman)

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