The U.S. dollar held on to gains against major currencies early on Wednesday, buoyed by demand for safety as conflict between Israel and Iran kept investors on edge ahead of a Federal Reserve decision on interest rates later in the day.
Israel has pounded Iran over the past six days to halt its nuclear activity and has asserted the need for a change of government in the Islamic republic.
The U.S. military is also bolstering its presence in the region, Reuters reported, sparking speculation of U.S. intervention which investors fear could spread into a region replete with energy resources, supply chains and infrastructure.
US dollar softens in choppy trade
Against this backdrop, the dollar has found support as a safe bid, firming roughly 1% against the Japanese yen, Swiss franc and euro since Thursday, helping it shave declines from earlier in the year.
The greenback had lost more than 8% earlier in the year due to eroding confidence in the U.S. economy amid trade policies.
“The dollar is still a safe haven because of its depth and liquidity so, yes the structural forces are diluting the dollar safe-haven activities, but they’re not eroding them completely,” said currency strategist Rodrigo Catril at National Australia Bank.
“But in a scenario of big risk aversion, the dollar will still gain support but maybe not to the same it has managed in the past.”
The dollar firmed as much as 0.1% against the yen on Wednesday to touch a one-week top. It was last at 145.21 yen.
In early Asia trade, the Swiss franc was flat at 0.816 a dollar and the euro was up 0.1% at $1.149. A broader index tracking the greenback against six other currencies was little changed after a 0.6% jump in the previous trading session.
A jump in crude oil prices to about $75 a barrel has also weighed on the euro and yen given the European Union and Japan are primarily net crude importers as opposed to the U.S. which is a net exporter.
Investors’ next point of focus is the Fed which is set to decide whether to change its interest rates.
Recent data showed the U.S. economy was slowing amid President Donald Trump’s erratic policymaking style, and higher crude prices due to conflict in the Middle East is also complicating the Fed’s task.
Traders expect the central bank to leave borrowing costs unchanged and will be keen to hear the Fed’s outlook for interest rates this year and the overall health of the economy.
“In the very near term a cautious message will probably be reemphasised, but what will be interesting is how they interpret and navigate the new forecast, which we think will show a lower growth path alongside potentially stickier inflation,” Catril said.
The Bank of Japan on Tuesday was first among major central banks to announce a rate decision in the latest round of policy meetings worldwide. It left rates unchanged and said it will decelerate its bond tapering plan to calm a recent selloff in bond markets.
Central bank verdicts are also due from Britain, Switzerland, Norway and Sweden later in the week. Signs that trade uncertainty was damaging countries across the globe were evident as Japan reported a decline in exports in May for the first time in eight months.
An area of frustration for investors was a Group of Seven meeting in Canada yielding little on the tariff front, ahead of Trump’s early July deadline for additional levies.
Trump said Japan was being “tough” in trade talks and the European Union had not yet offered what he considered a fair deal.
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