The US Dollar edged lower from this week’s peak on Thursday as renewed hostilities between the United States and Iran unsettled markets. However, a surge in oil prices reignited inflation concerns, reinforcing expectations that the Federal Reserve may raise interest rates sooner rather than later.
Minutes from the Fed’s June policy meeting, released on Wednesday, showed officials remained open to another rate hike this year, although policymakers were divided over the appropriate timing.
If tensions in the region escalate further and oil prices continue to climb sharply, the Dollar could extend its recent gains, particularly after the Federal Reserve signalled it remains open to raising interest rates later this year, Reuters reports.
The Dollar index slipped 0.2% to 100.91 on Thursday, pressured mainly by a stronger Euro, which gained 0.2% to $1.1435. Meanwhile, the Japanese Yen remained near its weakest level in four decades at 162.32 per Dollar, staying within a range that could prompt intervention by Japanese authorities to support the currency.
The yen continued to face pressure as oil prices climbed following the latest exchanges between the United States and Iran. Higher energy costs weigh heavily on Japan, which relies heavily on imported fuel, adding to concerns over the country’s already strained fiscal position.
Currencies have experienced heightened volatility across the board this week.
A renewed escalation of tensions in the Middle East has once again unsettled global markets, prompting investors to reprice assets with a higher geopolitical risk premium.
The most significant knock-on effect of the surge in oil prices is its potential impact on inflation and global interest rates. Sustained gains in crude prices could stoke inflationary pressures, increasing the likelihood that the US Federal Reserve will bring forward the timing of its next interest rate hike.
The US military said it had launched a fresh wave of strikes against Iran just hours after President Donald Trump declared that an interim agreement to end the conflict was “over,” sending oil prices sharply higher.
The increasingly hawkish rhetoric served as a wake-up call for investors over the risk of accelerating inflation, pushing US 10-year Treasury yields to their highest level in seven weeks as markets priced in a greater likelihood that the Federal Reserve could raise interest rates later this year.
Minutes from the Federal Open Market Committee’s June meeting, the first under Chair Kevin Warsh, showed policymakers growing increasingly concerned about inflationary pressures. Following the release, markets raised the implied probability of a Federal Reserve rate hike this year to around 87%, according to the CME FedWatch Tool.
Brent crude futures eased 1.5% to around $77 a barrel on Thursday after surging more than 5% in the previous session to their highest level in around two weeks.
Elsewhere, the New Zealand Dollar outperformed its major peers on Thursday, climbing 0.7% to $0.574 after the Reserve Bank of New Zealand raised interest rates a day earlier and said that further tightening remained possible if inflationary pressures persisted.
The Australian Dollar also advanced, rising 0.14% to $0.694, while Sterling gained 0.2% to $1.342 against the US Dollar.