NEW YORK: The US dollar retreated from a six-week high on Wednesday on rising hopes that the US is nearing a deal with Iran to end the war in the Middle East. US President Donald Trump said negotiations with Iran were in the final stages, while warning of further attacks unless Iran agrees to a deal.
Concerns are growing that inflation linked to the war may become more entrenched in core consumer spending, driving expectations of higher interest rates and a more hawkish stance from central banks.
Benchmark 10-year US Treasury yields reached a 16-month high on Tuesday, while 30-year yields hit their highest level since 2007. The surge in yields provided further support for the dollar.
“The increase in the bond yields can be explained by the increase in expectations for the overnight rate at the end of the year,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Fed funds futures traders are pricing in roughly 50 percent odds that the Federal Reserve will raise rates by December — a sharp reversal from before the Iran war began in late February, when markets had expected two cuts this year.
Accelerating economic growth has reinforced expectations of higher rates, while a resilient labor market has reduced the case for cuts.
Markets are also watching closely for signals on how new Fed Chair Kevin Warsh will respond to rising price pressures. Trump acknowledged in an interview with Fortune magazine published on Monday that he may need to wait until the war with Iran concludes before rate cuts become feasible. Trump said on Tuesday the United States may need to strike Iran again, adding that he had been an hour away from ordering an attack before postponing it. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.12 percent to 99.19, with the euro up 0.1 percent at USD1.1616.
Sterling strengthened 0.22 percent to USD1.3423.
The Australian dollar, often seen as a barometer for risk sentiment, strengthened 0.52 percent versus the greenback to USD0.7146.
The dollar’s rise has pushed the yen back toward the 160 level that prompted Japanese officials last month to launch their first currency market intervention in nearly two years.
The Japanese yen was last up 0.08 percent against the greenback at 158.88 per dollar.
“We’re waiting for the Japanese response. We’re fishing for their pain threshold,” said Chandler. Tokyo stepped in to stem the yen’s slide through several rounds of intervention at the end of April and in early May, sources told Reuters, though the yen’s strength proved short-lived.
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