The Dollar remained close to a two-week high on Wednesday as renewed tensions in the Middle East pushed oil prices higher, reigniting inflation concerns and putting further upward pressure on bond yields.
The Dollar index, which tracks the greenback against a basket of major currencies, climbed 0.11% to 99.79, its highest level since 17th August. Meanwhile, the Euro slipped 0.14% to $1.1576.
The US Dollar’s safe haven appeal has been strengthened by rising Treasury yields and increasing expectations that the Federal Reserve could raise interest rates, despite recent economic data falling short of forecasts.
The US launched a barrage of airstrikes against Iran on Tuesday, triggering Iranian retaliation in the most significant escalation in tensions in several weeks.
Oil prices continued to climb on Wednesday following a sharp jump in the previous session. Brent crude futures gained 0.75% to $95.36 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 0.41% to $90.62.
The yield on the benchmark US 10-year Treasury rose as high as 4.812%, its highest level since November 2023, before easing back to 4.804%.
Whereas Japan’s benchmark 10-year bond yield continued its upward climb on Wednesday, reaching 3.01% after hitting the 3% mark on Tuesday for the first time in three decades.
Rising yields tend to boost demand for safe haven currencies such as the US Dollar, while weighing on riskier assets, including equities.
In addition, the New Zealand Dollar fell 1.01% against the greenback to $0.5844, its weakest level since 13th August, despite the country’s central bank raising its official cash rate by 25 basis points to 2.75%. Analysts said investors viewed the rate hike as less hawkish than anticipated.
“Relative to where markets were and what they might have expected, it doesn't meet their expectations,” according to Westpac New Zealand strategist Imre Speizer.
Moreover, July’s JOLTS job openings and the August ISM manufacturing index both came in below market expectations in overnight releases. However, money markets have strengthened bets on a Federal Reserve rate hike following Chair Kevin Warsh’s speech in Jackson Hole, Wyoming, last week.
Markets are now pricing in a 68% probability of a September Fed rate hike, up sharply from around 40% a week ago, as per CME Group’s FedWatch tool.
Investors will receive August employment and consumer inflation data ahead of the Federal Reserve’s 15th-16th September meeting. The latest jobs report, due on Friday, is expected to show that US employers added 56,000 jobs last month, based on the median forecast from economists surveyed by Reuters news agency.
Fed Governor Michael Barr said on Tuesday that the central bank may need to raise interest rates if inflation fails to ease rapidly.
The British Pound slipped 0.15% to $1.3495, its lowest level since August 14, while the Australian Dollar also weakened 0.15% to $0.7133.