NEW YORK: The US dollar rose on Tuesday and was on track for a fourth straight session of gains, as the latest round of attacks in the Middle East sent oil prices higher and stoked concerns about persistent inflation.
Two oil tankers carrying Saudi crude to Asia reversed course in the Red Sea after threats from Yemen’s Iran-aligned Houthis, as a widening Middle East conflict disrupted shipping through two of the world’s most critical energy chokepoints. The US military said on Monday that it finished its latest round of strikes on Iran, marking its 10th straight night of attacks.
US crude rose 2.32 percent to USD85.16 a barrel and Brent rose to USD91.27 per barrel, up 2.3 percent on the day after hitting USD91.56, its highest since June 11.
Optimism that a durable peace deal could be reached between the US and Iran had pushed crude prices down as May began, and recent subdued inflation data had cooled market expectations of a rate hike at its policy meeting next week.
But oil prices have reversed in recent days as tensions in the region have flared, and comments from multiple Fed officials, including Chairman Kevin Warsh, have flagged concerns about inflation pressures. The dollar index, which measures the greenback against a basket of currencies, rose 0.1 percent to 101.09, with the euro down 0.04 percent at USD1.141.
“We’re now on the tenth night of strikes in Iran, so the market is pricing things rationally here,” said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto.
“The Fed is hawkish, I don’t think the marketplace fully appreciates that yet, and the longer this conflict goes on in the Middle East, the risks of the Fed sounding even more hawkish increase. Despite the hostilities, efforts to find a diplomatic solution continue.
A senior Iranian official told Reuters on Monday that Tehran had received a proposal from mediators for a 10-day ceasefire.
Expectations for a hike from the Fed of at least 25 basis points at its meeting next week have crept back up to 17.6 percent, up from the roughly 11 percent last week but well below the 38.5 percent from a month ago, according to CME FedWatch.
For the September meeting, markets are pricing in a 68.1 percent chance for a hike. The Canadian dollar weakened 0.15 percent versus the greenback to CD1.409 per dollar, after the US imposed a new tariff of 50 percent on a wide range of Canadian products in response to Ottawa’s “discriminatory treatment” of American-made cars, alcohol and dairy goods.
Sterling weakened 0.31 percent to USD1.3386 as investors weighed the prospect of higher government spending and how new finance minister John Healey will finance it. Andy Burnham became Britain’s seventh prime minister in a decade on Monday, and reiterated his commitment to stick to the previous government’s fiscal rules.
John Healey, the former defence secretary, was appointed the new finance minister. Labor market data showed Britain’s jobs market appears to have stabilized at weak levels, with official data showing annual wage growth and unemployment steady in the three months to May and payrolled employment little changed in June despite the recent political turmoil.
“Today’s data point to a loose labor market with little wage pressure, but one that is not worsening dramatically at the current juncture,” said Jack Meaning, UK chief economist at Barclays, in a note.