The dollar index has surged to 99.50, up 0.35% on the day, marking a significant escalation from earlier levels as tensions between the US and Iran continue to escalate. According to Business Standard, the exchange of attacks between the two nations has significantly dented optimism towards a permanent peace deal, with the resumed military strikes resulting in an increase in oil prices that could boost inflation expectations further towards a hawkish Federal Reserve stance. The latest developments show Iran said on Tuesday that U.S. strikes near the Strait of Hormuz represented a 'gross violation' of a ceasefire in place for nearly seven weeks, while the U.S. maintained its attacks were defensive in nature. In response to the alleged US attack near Bandar Abbas, Iran's Revolutionary Guards claimed responsibility for targeting a US airbase, while Kuwait reported intercepting hostile missiles and drones.
The dollar index, which measures the greenback's strength against a basket of six major peers, was steady at 99.288 near its highest level since May 22, as reported by CNBC TV18. However, the latest surge has pushed the index to 99.50, up 0.35% on the day, marking a significant extension of the earlier gains. The euro was a shade lower at $1.1620, while the pound was down 0.1% at $1.34176. The risk-sensitive Australian dollar weakened 0.2% to $0.71305, and the New Zealand dollar was largely flat at $0.58965. According to Citi's head of global quant macro strategy Alex Saunders, geopolitics and subsequent inflation risks remain key concerns, with markets continuing to see a trim in the USD underweight position. Investors are increasingly expecting the greenback to break higher as the Federal Reserve shifts focus to battling inflation amid elevated energy prices.
The pound fell for a second day against the euro on Wednesday and made little headway against the dollar, as doubts about the likelihood of peace in the Middle East made traders cautious. As reported by Reuters, sterling weakened against the euro, which rose 0.1% to 0.8659 pence, and was steady against the dollar at $1.3452. The nearly 7% drop in oil prices this week has provided some respite to import-dependent currencies like sterling, but overall trading ranges have been narrow and volatility contained. UK energy regulator Ofgem hiked its price cap by 13%, the most in more than two years, in response to a surge in wholesale gas prices caused by the Middle East conflict. However, Kathleen Brooks from broker XTB noted that increased use of renewable energy in the UK meant the price cap was not rising as fast as in 2022, and a potential peace deal could further limit energy bill increases.
Markets are now looking ahead to today's release of the Fed's preferred inflation gauge, the core PCE deflator for April, which will help shape the broader interest rate outlook, as reported by CNBC TV18. The shift in Fed focus to battling inflation amid elevated energy prices has contributed to dollar strength, with investors increasingly expecting the greenback to break higher as monetary policy priorities change. The resumed military strikes between the US and Iran have further complicated this outlook, with the exchange of attacks significantly denting optimism towards a permanent peace deal. Investors will now focus on the US Personal Consumption Expenditure Price Index (PCE) data for April, which will be published later today, for further cues on the Federal Reserve's future policy stance.
