Dollar holds near 2-month high as markets weigh rate hikes, Iran diplomacy

The US dollar held steady near its strongest level in two months on Wednesday, buoyed by expectations of rate hikes in the near future, while easing oil prices due to hopes for a diplomatic resolution to the ongoing Middle East conflict kept a watchful eye on investors, according to Reuters. The euro dipped to $1.1446 in early trading, hovering close to its weakest level since late July, whereas the British pound strengthened to $1.3337.

The dollar index, measuring the US currency against six peers, settled at 100.56. The recent cascade of rate hikes and hawkish statements from key central banks have dominated currency markets, as the Israel-Iran conflict drives oil prices upward and fuels inflation concerns. Anticipation of additional tightening from central banks looms, with Federal Reserve officials suggesting more hikes if inflation remains stubborn.

Kieran Williams, head of Asia FX at Intouch Capital Markets, noted that while the dollar's rate support appears robust, futures already price more tightening than the Fed's own projections, meaning the dollar now hinges on data confirmation.

Oil markets remain a focal point, with Brent crude futures trading at $99.22 per barrel, driven by optimism that UN General Assembly diplomacy could resolve the Middle East war. However, Brent has surged 37% since the conflict began in late February. US President Donald Trump has threatened to "annihilate" Iran if no agreement ends the war, yet also hinted at a possible deal emerging from recent diplomatic efforts at the UN.

Nevertheless, analysts caution that the path forward remains uncertain due to the unresolved nature of the conflict.

Meanwhile, the Japanese yen stood at 157.55 per US dollar, reflecting ongoing skepticism regarding the adequacy of the Bank of Japan's recent rate hike to a 31-year high. The mixed vote and lack of a clear hawkish message from officials have raised doubts about the speed of further policy tightening, especially given the Fed's recent rate increase and subsequent hint of more hikes.

The Bank of Japan's recent hike did not significantly narrow the yield gap, as the Fed had already hiked rates by the same amount two days prior, leaving the Japanese market in a low liquidity state, making intervention a potential option for authorities if needed.