Dollar holds firm at nearly two-week high as Middle East hostilities lift oil

The US dollar maintained its strength on Wednesday as Middle East tensions escalated, causing oil prices to surge and reignite worries about rising inflation. The currency's appeal as a safe haven was bolstered by increasing Treasury yields and expectations of a Federal Reserve rate hike, despite recent economic data falling short of estimates.

The United States initiated airstrikes against Iran on Tuesday, prompting Iranian counterattacks in the most intense flare-up in weeks. Oil prices jumped nearly one percent early Wednesday, with Brent futures climbing 0.92 percent to $95.52 a barrel and US West Texas Intermediate crude advancing 0.89 percent to $91.02. Expert Kumiko Ishikawa of Sony Financial Group emphasized the importance of maintaining caution in the Middle East situation.

The dollar index stood at 99.67. Economic indicators released earlier, including July JOLTS job openings and the August ISM manufacturing index, were below market expectations, but money markets have backed up predictions of a Federal Reserve rate increase following Fed Chair Kevin Warsh's speech at Jackson Hole. Markets now anticipate a 67 percent probability of a September Fed hike, up from about 40 percent a week ago, according to CME Group's FedWatch tool.

The US data should be treated with the understanding that weak figures could be mitigated by heightened tensions in the Middle East. August's job and consumer price inflation data are both expected before the Fed's September 15-16 meeting. The upcoming jobs report, due out Friday, is anticipated to show employers added 56,000 jobs last month, according to a Reuters survey of economists.

Fed Governor Michael Barr stated on Tuesday that if inflation does not ease rapidly, it will be time for the US central bank to raise interest rates. The yield on the benchmark US 10-year notes rose to 4.8 percent, while Japan's benchmark 10-year yield reached 3 percent on Wednesday, after hitting the 30-year mark on Tuesday. Higher yields make investors gravitate toward safe-haven currencies like the US dollar, weakening the case for riskier assets like equities.

The New Zealand dollar showed slight weakness at $0.5889, ahead of a Reserve Bank of New Zealand policy decision later in the session, when the central bank is expected to raise interest rates by a quarter point to 2.75 percent. The British pound declined 0.04 percent to $1.3509, and the Australian dollar remained steady against the greenback at $0.7143.

In cryptocurrencies, Bitcoin fell 0.07 percent to $77,376.22, while Ethereum dropped 0.08 percent to $2,418.26. The Japanese yen remained largely unaffected against the US dollar at 160.21 per dollar, staying above the psychologically significant 160-per-dollar mark despite widespread expectations that the Bank of Japan will raise rates this month.

US Treasury Secretary Scott Bessent expressed strong backing for decisive monetary measures to address yen weakness during a meeting with BOJ Governor Kazuo Ueda. Ueda indicated a willingness to discuss with his board at the month's meeting whether the economy aligns with its forecast and if inflation risks are intensifying. A hawkish BOJ board member is scheduled to deliver a speech later on Wednesday.

The rare joint intervention from the US and Japan in July provided temporary relief to the vulnerable yen, moving it away from the 40-year lows of 163.99, but the currency has since lost about half of those gains since the coordinated effort. Experts suggest that another round of actual coordinated intervention between the US and Japan is unlikely until there is a de-escalation in the Strait of Hormuz, alleviating pressure on oil prices.