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

The dollar index reached a near two-month high of 100.56 on Wednesday, as investors weighed the prospect of upcoming interest rate hikes and eased oil prices following hopes of a diplomatic solution to the Middle East conflict. Meanwhile, the euro hovered near its weakest level since late July, trading at US$1.1446. The US dollar index, which tracks the value of the US currency against six counterparts, was bolstered by the string of rate hikes and hawkish statements from major central banks.

Analysts, such as Kieran Williams of Intouch Capital Markets, noted that while the dollar's support from rates appears robust at the moment, market expectations of further tightening by central banks have surpassed the Federal Reserve's projections. Consequently, the dollar may now rely on actual data to confirm the anticipated rate hikes.

Oil prices remained a focal point, with Brent crude futures at US$99.22 per barrel due to optimism surrounding potential UN General Assembly diplomacy to resolve the war. However, oil prices have softened from their recent highs, and uncertainty persists regarding a potential resolution to the conflict. Additionally, the impending meeting between US President Donald Trump and Chinese President Xi Jinping was anticipated to foster stability in their strained relationship, which has been contentious across multiple issues.

The Japanese yen stood at 157.55 per US dollar, reflecting continued skepticism about the Bank of Japan's recent aggressive rate hike as insufficiently hawkish. With the Bank of Japan's market reaction still ambiguous and the Federal Reserve's announcement of additional rate hikes, the yen's value remained uncertain. Analysts observed that the BOJ hike did not significantly narrow the yield gap, as the Fed had increased rates the previous day and signaled more hikes ahead.

The Japanese market, set to close for a holiday, provided a low-liquidity environment that could potentially facilitate intervention by authorities, should the need arise.