Dollar ticks up on Iran tension, with US data in focus

The US dollar experienced a slight uptick on Wednesday, Aug 12, as heightened Gulf tensions and anticipation of US economic data influenced market sentiment. Oil prices saw a marginal increase following simultaneous attacks on shipping by the United States and Iran-aligned Houthis in Yemen. Teheran declared the Strait of Hormuz closed until Washington agreed to its conditions.

Investors turned to the dollar as a safe-haven when worries about the economic ramifications of an Iran conflict grew. Analysts noted that the recent subdued US employment data had minimal impact on the greenback, as markets anticipated inflation to drive the next Federal Reserve interest rate hike. Austan Goolsbee, President of the Federal Reserve Bank of Chicago, echoed this sentiment, expressing greater concern over inflation rather than labor market issues.

Economic data expected later in the day indicated that inflation had risen last month after decreasing in June, with oil prices falling due to hopes of an Iran peace deal. A robust performance, especially in core services or shelter, could reverse recent trends and spur a significant bid for the dollar, as macro strategist Wee Khoon Chong from BNY predicted.

Conversely, a weak report or one in line with expectations would reinforce current positions favoring the US dollar, encouraging further outflows. Fed funds futures suggest a 50% probability of the central bank maintaining rates unchanged during its meeting on September 16, according to CME Group's FedWatch tool. The US dollar index, which gauges the dollar's strength against a basket of six currencies, rose 0.05% to 99.85.

The standalone currency was down 0.05% at US$1.1536, after peaking at US$1.1580 on Monday—its highest level in nearly two months. Robust economic indicators from the eurozone have struggled to bolster the euro as investors grapple with the impact of higher natural gas prices above 60 euros. Given their critical role in heating, power generation, and industry, gas prices exert a more significant influence on eurozone inflation than oil, making them a primary focus for the European Central Bank.

US Treasury yields and the ongoing reduction of Fed tightening expectations will likely bolster the yen, with a possible September rate hike from the Bank of Japan reinforcing the central bank's commitment to normalizing policy. Market pricing points in the same direction, with Japan's government bond yields signaling growing expectations of a BOJ rate hike next month.

The yen weakened by 0.05% against the dollar to 159.38, hitting its weakest levels of the month despite recent joint intervention by US and Japanese authorities to support the yen. "The CFTC report released last week did demonstrate that this intervention precipitated a sharp squeeze of speculative short yen positions," Lee Hardman, senior currency economist at MUFG, remarked.

"If there is no change in fundamentals, speculators will likely be encouraged to rebuild short yen positions amid stable financial market conditions that remain favorable for carry trades." The British pound remained roughly unchanged, nearing its one-month high. Meanwhile, the New Zealand dollar slipped 0.36% to US$0.5860 following Prime Minister Christopher Luxon's announcement on Wednesday that he had secured a confidence vote from ruling party lawmakers, following speculation about his leadership months before a general election.