Dollar holds firm as Middle East hostilities drive oil prices higher

The dollar maintained its strength on Wednesday as tensions in the Middle East led to a surge in oil prices and heightened concerns about inflation. The dollar's safe-haven status was bolstered by rising Treasury yields and expectations of a Federal Reserve rate hike, despite economic data that fell short of expectations. The United States launched airstrikes against Iran on Tuesday, triggering a retaliatory response and marking the most significant escalation in weeks.

Oil prices jumped nearly 1% in early trading on Wednesday, with Brent futures climbing 0.92% to $95.52 a barrel and US West Texas Intermediate (WTI) up 0.89% to $91.02. Kumiko Ishikawa, a senior FX analyst at Sony Financial Group, cautioned that continued vigilance was necessary regarding the Middle East situation. The dollar index, measuring the greenback against a basket of currencies including the yen and euro, stood at 99.67.

Tuesday's job openings data and the August ISM manufacturing index released the previous day were both below forecasts, but market expectations have now shifted to a 67% chance of a September Fed hike, up from around 40% a week earlier. US economic data, such as weak figures, could be mitigated by the Middle East tensions. August's jobs and consumer price inflation data are scheduled before the Fed's September 15-16 meeting.

The upcoming jobs report is anticipated to reveal that employers added 56,000 jobs last month, according to analysts' median estimate. Fed Governor Michael Barr suggested that if inflation fails to subside quickly, it would prompt the central bank to raise rates. Benchmark US 10-year notes yields rose to 4.8%, while Japan's benchmark 10-year yield was at 3% on Wednesday, having hit the 30-year mark the previous day.

Higher yields attract investors to safe-haven currencies, including the US dollar, while diminishing the appeal of riskier assets like equities. The New Zealand dollar weakened slightly to $0.5889 ahead of a Reserve Bank of New Zealand policy decision, where a quarter-point interest rate hike to 2.75% is expected. The British pound slipped 0.04% to $1.3509, and the Australian dollar remained flat against the dollar at $0.7143.

In cryptocurrencies, Bitcoin declined 0.07% to $77,376.22, while Ethereum dropped 0.08% to $2,418.26.