The American dollar maintained strength near its highest level in six weeks on Wednesday as markets grapple with the possibility of elevated interest rates needed to combat inflation stemming from the Iran conflict, driving the Japanese yen back toward levels that prompt intervention.
Market sentiment has been dampened by uncertainty surrounding when the Middle East conflict might conclude, sparking concerns about inflation and causing a worldwide bond market selloff. The 30-year U.S. Treasury bond yield reached its peak level since 2007.
President Donald Trump indicated the United States might need to take military action against Iran once more, while also suggesting Iran seeks an agreement to conclude the conflict that has disrupted markets and caused energy costs to surge.
The euro was trading at $1.1608, after reaching its weakest position since April 8 during the prior trading session. The British pound stood at $1.3398, close to the six-week low it hit earlier this week.
The Australian dollar, commonly viewed as a measure of market risk appetite, declined 0.14% to $0.7097, while the New Zealand dollar dropped 0.24% to $0.5822.
Measured against a collection of major currencies, the dollar held steady at 99.306. The currency index has gained more than 1% during May due to safe-haven buying and market expectations that the Federal Reserve may raise rates before year-end.
Market participants now see greater than 50% odds of a rate increase in December, according to CME FedWatch data, representing a dramatic shift from the two rate reductions anticipated before the conflict began. Investment professionals will focus on the Fed’s meeting minutes scheduled for release later Wednesday.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, anticipates the minutes will take a hawkish stance, potentially driving the dollar higher. She noted that additional Fed policymakers have expressed concerns about elevated U.S. inflation following the central bank’s April meeting.
“We continue to expect the FOMC to start a tightening cycle in December,” Kong said.
The delicate ceasefire established in April has largely remained intact, though markets continue to worry as the Strait of Hormuz — a crucial pathway for worldwide oil and commodity shipments — remains essentially blocked.
Brent crude futures traded at $110.8 per barrel during early sessions, significantly above pre-war levels from late February.
The dollar’s strength has driven the yen back toward the 160-per-dollar threshold that prompted Japanese authorities to conduct their first currency intervention in almost two years last month.
Tokyo intervened multiple times to halt the yen’s decline during late April and early May, according to sources who spoke with Reuters, though the yen’s recovery proved short-lived. The currency last traded at 159.03 per U.S. dollar, its weakest position since April 30.
“Near term, excessive volatility is key while 160/161 remains the line to watch,” said Christopher Wong, currency strategist at OCBC.
“Intervention risk should make markets more cautious about chasing dollar/yen higher, but unless U.S. Treasury yields and the broad USD soften, official action may only temporarily slow the move rather than reverse it,” he said.
