The Dollar climbed to a two-month high on Wednesday as markets priced in the prospect of further interest rate increases in the near term, although a decline in oil prices could ease pressure on global inflation and influence the outlook for monetary policy.
The Euro slipped to its lowest level since late July, trading 0.25% lower at $1.142 at the time of writing, while Sterling fell 0.3% to $1.3305. The Dollar index, which tracks the US currency against six major peers, gained 0.24% to 100.79.
Expectations of further rate hikes and increasingly hawkish signals from major central banks have become a key focus for currency markets, Reuters reports. The US-Israeli conflict with Iran has pushed oil prices higher, adding to concerns over inflation and the potential impact on interest rates.
Investors are increasingly pricing in more interest rate hikes, while several Federal Reserve officials have indicated this week that additional tightening could be on the table if inflation fails to ease quickly enough.
It is another indication that the Federal Reserve remains the dominant focus for markets, with hawkish comments from policymakers continuing to support demand for the US Dollar.
Oil markets remain firmly in focus. Brent crude futures edged back above $99 a barrel on Wednesday, ending a five-day losing streak driven by hopes that diplomatic efforts at the UN General Assembly could help resolve the seven-month conflict in the Middle East.
Brent futures have gained 37% since the conflict began at the end of February, while physical oil prices are at least 75% higher in Europe and more than 40% higher in the US.
Crude oil prices may have eased from their recent highs, but refined fuel prices remain elevated. Diesel, which is widely used across the transport sector, has climbed to record levels in the US and reached multi-year highs in Europe.
US President Donald Trump said on Tuesday that he supported the idea of banning diesel exports in an effort to bring down domestic prices. Analysts, however, have warned that such a move could disrupt global supply flows and ultimately do more harm than good.
Speaking at the UN on Tuesday, Trump warned that Iran could face destruction if no agreement is reached to end the war, while also indicating that a deal could be within reach as diplomatic efforts continued in New York.
Investors are also closely watching a high-stakes meeting between Trump and Chinese President Xi Jinping, with the two leaders seeking to stabilise relations strained by a broad range of unresolved issues.
The Japanese Yen was trading at 157.8 to the Dollar as traders remained alert to the possibility of currency intervention. The Bank of Japan’s rate hike to a 31-year high last week did little to convince investors that further increases were likely.
Japanese markets are closed for a public holiday, leaving trading volumes thinner than usual. Analysts say the reduced liquidity could provide an opportune window for authorities to intervene in the currency market if necessary.