NEW YORK: The dollar held firm against major currencies on Thursday, as fading hopes of Middle East de-escalation revived the risk of a prolonged energy shock and boosted safe-haven demand.
New US jobless claims edged higher last week, signaling a still-stable labor market and giving the Federal Reserve room to keep rates steady while watching war-related inflation risks.
Stocks mostly fell and oil prices advanced as investor caution grew over the uncertain trajectory of diplomatic efforts, bolstering the dollar. Iran’s foreign minister said the country was reviewing a US proposal to end the war but did not intend to hold talks.
“The overall tone right now is a tide of sort of disappointment washing across markets as the prospects for a cease fire in the Middle East fade,” said Karl Schamotta, chief market strategist, at Corpay in Toronto.
“Traders are still piling into safe-haven trades and bracing for a more protracted blockage in the Strait of Hormuz and for an eventual overheat in major economies as elevated energy prices hit.” The euro weakened 0.14 percent to USD1.1542, and sterling slipped 0.09 percent to USD1.3353.
The dollar also rose 0.05 percent on the Japanese yen to 159.54 yen. As the previous day’s optimism waned, oil was last 4.16 percent higher at USD106.47 a barrel.
The US is a net energy exporter, unlike the euro zone, Britain or Japan. US markets are fully pricing three European Central Bank rate hikes this year, and close to doing so from the Bank of England as well.
The ECB has “an option” to raise interest rates at its next meeting if war in the Middle East raises the specter of an inflation surge in the euro zone, policymaker Joachim Nagel told Reuters.
However, Bank of England Deputy Governor Sarah Breeden said she saw less risk of second-round inflation effects from rising energy prices caused by the Iran war than from Russia’s full-scale invasion of Ukraine in 2022, due to greater labor market weakness.
“The broader central bank backdrop retains a hawkish tilt, with markets repricing the Fed toward roughly 10 bps of tightening this year, a notable shift from cuts being priced in as recently as last week,” said Uto Shinohara, senior investment strategist, at Mesirow Currency Management in Chicago.
Against the Chinese yuan, the US dollar rose 0.15 percent to 6.915 yuan in offshore trading. US President Donald Trump said he will meet Chinese President Xi Jinping on May 14 and 15 following a delay due to the Iran war.
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