NEW YORK: The dollar fell on Monday after Federal Reserve Vice Chair for Supervision Michelle Bowman said that the US central bank should consider rate cuts soon, reversing the dollar’s earlier rally following the US bombing of some nuclear sites in Iran.
Bowman said the time to cut interest rates may be fast approaching as she has grown more worried about risks to the job market and less concerned tariffs will cause an inflation problem.
The dollar had been boosted by the Federal Reserve’s “hawkish hold” on Wednesday, when the US central bank left interest rates unchanged while Chair Jerome Powell said policymakers expect inflation to rise over the summer due to the Trump administration’s tariffs.
Powell will testify before the US Congress on Tuesday and Wednesday.
The US currency was earlier lifted as investors unwound riskier positions on concerns about an expanding conflict in the Middle East.
Iran has pledged to retaliate for the bombings and has threatened to close the Strait of Hormuz, through which about a fifth of global oil supply flows.
The dollar gains were largely due to traders unwinding trades that had used it as a funding currency, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. These included trades betting on strength in riskier emerging market currencies.
“What it really is about is unwinding these funding trades, where the dollar is a short leg of the trade,” said Chandler, adding that “I don’t think it’s a big turn in the dollar.”
The Japanese yen, meanwhile, fell on concerns about higher oil costs.
Bank of America strategists said the dollar/yen can reprice higher if oil prices remain elevated, noting Japan imports almost all of its oil, more than 90% of which comes from the Middle East, while the US is largely energy-independent.
The Japanese currency was last down 0.45% against the US dollar at 146.77 per dollar and reached 148.02, the weakest since May 13.
The dollar index fell 0.14% to 98.78. It earlier rose to 99.42, the highest since May 30.
Goldman Sachs FX analysts said on Monday that the Norwegian crown, Canadian dollar and Colombian peso should be among the clearest beneficiaries from rising oil prices, while the Swiss franc is often among the best performers during geopolitical risk off episodes.
However, “there has been no clearly identifiable pattern in this morning’s price action between currencies’ moves and their historical sensitivities to oil or risk,” they said in a report, likely due to muted market reactions in assets including oil, gold and stocks.
The euro gained 0.08% to $1.1528.
The euro zone economy flatlined for a second month in June as the bloc’s dominant services industry showed only a small sign of improvement and manufacturing displayed none at all, a survey showed on Monday.