Currency traders adopted a wait-and-see approach Wednesday as the U.S. dollar maintained stability amid ongoing uncertainty about the escalating conflict involving the United States, Israel and Iran.
Financial markets had initially anticipated that President Donald Trump might work toward a quick end to the hostilities, though Trump has simultaneously issued strong warnings about striking Iran if it interferes with energy shipments through the critical Strait of Hormuz waterway.
The American currency had strengthened significantly during the conflict’s early days as oil prices climbed, but has since retreated somewhat on speculation the crisis might resolve quickly. However, market experts doubt such an outcome.
“We expect the war to run for months, not weeks, while acknowledging the high level of uncertainty,” said Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia.
Tuesday saw what both Pentagon officials and Iranian sources described as the most devastating air attacks since fighting began, with U.S. and Israeli forces conducting intensive strikes against Iranian targets.
Escalating tensions further, Iran’s Islamic Revolutionary Guard Corps threatened to halt Gulf oil shipments unless American and Israeli military operations stop immediately.
These rapidly changing Middle Eastern developments have created challenges for traders attempting to accurately assess market risks, leading many to pause their activities temporarily.
“Traders are largely sitting on their hands and waiting for further news and greater clarity so that risk can be priced more efficiently,” said Chris Weston, head of research at Pepperstone.
During early Asian trading, the euro traded at $1.16205, showing modest improvement from Monday’s three-month low. The British pound gained 0.12% to reach $1.34305.
The dollar index, tracking the U.S. currency against six major competitors, registered 98.876, moving slightly away from Monday’s three-month peak.
Australia’s dollar, considered sensitive to global risk sentiment, remained near Tuesday’s nearly four-year high at $0.713.
The Australian currency’s strength followed Reserve Bank of Australia Deputy Governor Andrew Hauser’s Tuesday warning that rising oil costs would increase inflation pressures and potentially trigger interest rate increases at next week’s policy meeting.
“The war in the Middle East has had some large impacts on expectations for central bank interest rates,” CBA’s Clifton said. “Since the war began at the end of February markets have either moved from pricing cuts to pricing hikes, or to pricing less cuts than previously.”
Federal Reserve futures markets now anticipate only 39.7 basis points of rate reductions by year’s end, suggesting uncertainty about whether the central bank will implement a second quarter-point cut in 2024.
Market attention will focus on Wednesday’s February U.S. inflation report, with economists surveyed by Reuters predicting core consumer prices increased 0.2% monthly while overall prices rose 0.3%.
The Wall Street Journal reported Tuesday that the International Energy Agency has proposed its largest-ever strategic oil reserve release to counter crude price increases driven by the Middle Eastern conflict.
