Dollar holds firm as Middle East hostilities lift oil

On September 2, the U.S. dollar held steady amid Middle Eastern conflicts that lifted oil prices and reignited inflation worries. The currency's safe-haven status was bolstered by surging Treasury yields and expectations of a Federal Reserve rate increase, despite weaker-than-expected economic data. On Tuesday, the U.S. carried out airstrikes on Iran, leading to Iranian retaliation in the most significant escalation in weeks.

Oil prices jumped nearly 1% early on Wednesday, with Brent crude reaching $95.52 per barrel and U.S. WTI crude up 0.89% to $91.02. Kumiko Ishikawa, a senior FX analyst at Sony Financial Group, emphasized the need for continued Middle East situation monitoring. The dollar index stood at 99.67. While July employment and manufacturing data fell short of forecasts, market expectations have shifted toward a September Fed hike from around 40% to 67%, per CME Group's FedWatch tool.

If economic figures disappoint, their effect could be mitigated by heightened Middle East tensions, Ishikawa noted. Upcoming data includes August's jobs report on Friday, expected to show 56,000 new jobs added, and the Fed's September 15-16 meeting. Fed Governor Michael Barr suggested that persistent inflation could prompt the central bank to raise rates.

U.S. 10-year Treasury yields rose to 4.8%, while Japan's 10-year yield hit the 30-year high of 3%. Safe-haven currencies, including the dollar, benefited from higher yields, whereas riskier assets like equities faced headwinds. The New Zealand dollar was slightly weaker at $0.5889, ahead of a Reserve Bank policy decision. The British pound dipped 0.04% to $1.3509, while the Australian dollar remained unchanged at $0.7143.

Cryptocurrencies saw a slight dip, with Bitcoin falling 0.07% to $77,376.22, and Ethereum down 0.08% to $2,418.26. The yen remained stable against the dollar at 160.21, despite expectations of a Bank of Japan rate hike this month. After a rare U.S.-Japan joint intervention in July, the yen has regained half of its gains, but a coordinated action remains unlikely until the Strait of Hormuz situation eases.