The dollar is volatile as investors weigh the rate outlook, Middle East concerns

The US dollar wobbled on Thursday as fresh US attacks in the Middle East dampened sentiment, while May’s US Consumer inflation hit a three-year high, leaving investors uneasy about the Federal Reserve’s monetary policy outlook.

Currency markets were subdued this week, as investors weighed a fragile ceasefire in the Middle East against a renewed cycle of tit-for-tat strikes between the US and Iran, dashing hopes of a near-term peace deal.

The euro bought $1.1553, off last week’s 10-week low, but has given up most of its gains since the truce ended in early April. The European Central Bank’s policy meeting will be in the spotlight in the coming days as it looks set to raise rates to tackle inflation.

Sterling was at $1.33905. The dollar index, which measures the US currency against six major allies, fell to 99.903 after the US military said it had completed strikes against multiple targets in Iran.

The United States launched a new round of strikes in Iran overnight, the US military said, as President Donald Trump vowed more strikes if no peace deal is secured.

The recent hike had unsettled markets, pushing oil prices higher. Brent futures rose more than 2% to $95.40 a barrel. (O/R)

However, the market reaction was less volatile than in the past, with the dollar remaining relatively sluggish in early Asian trading.

“We still have some fatigue in the market, a couple of weeks ago this kind of growth would probably have sent Brent up to $100 a barrel and the dollar,” said Nick Twidell, chief market analyst at ATFX Global.

“It again comes down to markets craving some certainty,” Tweedle said. “Will this conflict and the closure of the Straits be the new status quo … or another ‘negotiating ploy’ that brings hopes of peace back to the table.”

Rat hike jitters

While the US consumer price index rose 4.2% in the 12 months to May, the biggest gain since April 2023, economists say the pace for monetary policy tightening is high.

So-called core CPI rose 0.2% on the month after rising 0.4% in April, boosting hopes that price pressures from the energy shock could be contained.

James Knightley, chief international economist at ING, said labor is the biggest cost for corporate America and wage growth continues to cool, which should help ease some of the pressure on core inflation.

“All of this helps keep inflation expectations in check, so while we don’t expect the Fed to cut interest rates this year given the improved economic momentum, we don’t expect a rate hike either,” Knightley said.

Traders fully priced in a 25-basis-point hike in December, a sharp turnaround from expectations of two rate cuts this year before the Iran war erupted in late February.

The Japanese yen was at 160.52 per dollar, leaving traders on edge about the possibility of official intervention from Tokyo.

Bank of Japan Governor Kazuo Ueda has been hospitalized for medical treatment and will miss the June 15-16 policy meeting, where the central bank is widely expected to raise interest rates.

“We do not expect Ueda’s absence to affect the BOJ’s policy decision,” said Carol Kong, currency strategist at Commonwealth Bank of Australia. “We and the market expect a 25bp rate hike next week.”

Among other currencies, the Australian dollar was at $0.7006 after touching a nine-week low earlier in the session. The New Zealand dollar was steady at $0.5797. (AUD/)