NEW YORK: The dollar edged higher and was on track for a weekly gain on Thursday, as a standoff between Iran and the United States escalated tensions in the Middle East and dashed hopes for a peace deal.
Iran showed off its tightened grip over the Strait of Hormuz on Thursday with video of its commandos storming a huge cargo ship, after the collapse of peace talks that Washington had hoped would open the world’s most important shipping corridor.
Tehran says it will not consider opening the strait, normally the route for a fifth of global oil and liquefied natural gas, until the US lifts a blockade of Iran’s own shipping, which Washington imposed during the ceasefire and Tehran calls a violation of that truce.
“The market is not 100 percent sure (the ceasefire is) going to hold, but it’s also not 100 percent sure it’s going to fall apart,” said Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank’s New York branch.
“It’s having a hard time understanding how long this is going to last and which way it’s going to go from here. So, it’s just treading water right now,” Englander said. “The real market issue is whether military action resumes.” The dollar has drawn safe-haven demand amid the uncertainty. It gained ground in March as concerns over the conflict deepened, but gave back some of those gains this month as optimism over a potential resolution grew.
“For now, at least, it’s still feeling as though the path of least resistance is just a maintenance of just adding to dollar positions slightly, so, unwinding that sort of peace premium that had been put back into the market,” CIBC Capital Markets head of G10 FX strategy Jeremy Stretch said. The euro was last down 0.07 percent at USD1.1694, having touched its lowest point since April 13 earlier on.
The single currency is headed for a 0.6 percent decline this week, its first drop in four weeks. Sterling was down 0.02 percent at USD1.3498, shrugging off data that showed an early impact of the US-Israeli war on Iran on British consumers who scaled back their spending on fuel. The Japanese yen weakened 0.03 percent against the greenback to 159.5 per dollar, near the 160 level that many in the market view as the line in the sand for official intervention. The Bank of Japan is expected to keep interest rates unchanged next week, but has hinted that a June hike is possible.
The dollar index, which tracks the performance of the US currency against six others, rose 0.08 percent to 98.69. It is heading for a weekly rise of 0.5 percent.
While the war remains the primary driver of market sentiment, recent economic data has also painted a resilient picture of the US economy.
Weekly jobless claims ticked up slightly last week but continued to point to a stable labor market, reinforcing expectations that the Federal Reserve will hold off on cutting rates.
Fed funds futures now price in just a 29 percent chance of a cut by year-end, as traders weigh the risk of war-driven inflation.
The US economy also looks better positioned than peers such as the euro zone, even as some central banks there lean toward tightening policy.
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