Dollar Holds Near Two-Week High as Middle East Conflict Lifts Oil and Yields
Renewed hostilities between the US and Iran have pushed oil prices and Treasury yields higher, reinforcing the dollar's safe-haven appeal and reshaping expectations for imminent central bank rate hikes.
The US dollar traded near a two-week high on Wednesday following renewed Middle East hostilities that drove oil prices upward and revived global inflation concerns. The dollar index rose 0.11 per cent to 99.79, marking its highest level since August 17.
Brent crude futures climbed 0.75 per cent to $95.36 a barrel, while US West Texas Intermediate crude gained 0.41 per cent to $90.62. This commodity surge pushed the benchmark US 10-year Treasury yield to an intraday high of 4.812 per cent, its firmest level since November 2023, before settling at 4.804 per cent.
Rising yields are strengthening the case for safe-haven currencies while undermining riskier assets. Despite recent US economic data falling short of forecasts, money markets are now pricing in a 68 per cent probability of a Federal Reserve rate hike in September.
This represents a sharp increase from the 40 per cent chance anticipated just a week ago. Federal Reserve Governor Michael Barr noted on Tuesday that a failure to cool inflation quickly would necessitate a rate increase, with crucial August employment and consumer price data due before the mid-September policy meeting.
The strong dollar exerted broad pressure on global peers. The euro slipped 0.14 per cent to $1.1576, while the British pound and Australian dollar each fell 0.15 per cent.
The New Zealand dollar slumped 1.01 per cent to $0.5844, its lowest point since mid-August. This drop occurred even after the central bank raised its official cash rate by 25 basis points to 2.75 per cent. Westpac New Zealand strategist Imre Speizer observed that the rate decision fell short of market hopes, noting that it "doesn't meet their expectations" relative to prior positioning.
Yen Remains Under Pressure
The Japanese yen hovered at 160.15 per dollar, remaining on the weak side of the psychologically significant 160 threshold despite overwhelming market expectations for a Bank of Japan rate hike this month. Japan’s benchmark 10-year yield extended its rally to 3.01 per cent after breaching the 3 per cent milestone on Tuesday.
US Treasury Secretary Scott Bessent recently expressed strong support for decisive monetary steps to combat the yen’s weakness during a meeting with BOJ Governor Kazuo Ueda. Ueda indicated he would discuss with his board whether the economy aligns with forecasts and if inflation risks are intensifying.
BOJ board member Hajime Takata argued the bank should execute interest rate hikes nimbly in response to inflationary pressures. However, IG market analyst Tony Sycamore stated, "There appears little chance of another round of actual co-ordinated intervention until there is some de-escalation in the Strait of Hormuz that takes heat out of the oil price."
In digital assets, bitcoin edged up 0.07 per cent to $77,485.49. Meanwhile, ether trimmed earlier losses to trade down 0.27 per cent at $2,413.74.
