Dollar posts weekly loss despite Middle East safe-haven demand
Escalating US-Iran tensions triggered a late-week flight to the dollar, though soft domestic inflation data kept the currency on track for a weekly loss.
The dollar was flat on Friday but headed for a weekly decline as traders balanced safe-haven demand triggered by Middle East hostilities against domestic data that reduced expectations for imminent Federal Reserve rate hikes. The dollar index stood at 100.76, on pace for a 0.2% drop over the week after touching a one-month low earlier in the session.
The currency found support after the United States and Iran exchanged fire, effectively shattering a truce established last month. The conflict disrupted traffic in the Strait of Hormuz and pushed oil prices toward one-month highs. "The tech-led global equity market plunge and ongoing disruption to Strait of Hormuz traffic have triggered a flight to safety," said Elias Haddad, global head of markets strategy at Brown Brothers Harriman. "USD recovered some of this week's losses, and global bond yields edged a bit lower."
Undermining the dollar's structural strength, however, is a shifting domestic rate outlook. U.S. consumer sentiment climbed to a five-month high in July, though traders caution this respite may prove temporary as renewed conflict drives up gasoline prices. Furthermore, June retail sales edged higher as a surge in online spending offset lower receipts at service stations, prompting economists to upgrade their second-quarter growth estimates.
Among major peers, the euro held steady at $1.1436 to post a 0.2% weekly gain. Sterling slipped 0.2% on the day to $1.3455 but notched a third consecutive weekly advance, bolstered by recent UK economic growth figures and reports that incoming Prime Minister Andy Burnham will appoint a centrist finance minister. The Australian dollar softened 0.23% to $0.6980 amid broader risk-off sentiment, though it also secured a third week of gains.
Yen intervention threat loses impact
In Asia, the Japanese yen remained flat at 162.44 per dollar, lingering near the 40-year low of 162.84 hit at the start of the month. Japanese Finance Minister Satsuki Katayama reiterated the government's readiness to take decisive action to support the currency. Traders, however, remain skeptical of the verbal warnings. "It would appear from the threat of decisive action that intervention is once again very close," said Shaun Osborne, chief FX strategist at Scotiabank. "I don't know that that's going to have any more of an impact on the yen than it's had previously."
