US dollar wavers amid renewed Iran attacks, yen slides on pensions doubts

[SINGAPORE/LONDON] The US dollar slipped on Monday (Jul 13) after giving up earlier gains as investors focused on renewed hostilities in the Gulf, while the yen slid following a Reuters report that Japan had no immediate plan to change state pension funds’ asset allocations.

The US currency rose earlier in the session along with oil prices but later lost ground, with the euro up 0.15 per cent at US$1.143. Sterling slipped very slightly to US$1.339, while the Australian dollar was flat at US$0.695.

US and Iranian forces exchanged heavy missile and drone assaults at the weekend, with Teheran targeting US facilities in states across the Gulf on Sunday and saying it had again closed the vital Strait of Hormuz shipping route. Oil prices rose, with Brent crude futures up 3.5 per cent at US$78.65 a barrel. The dollar index, which tracks the currency against six peers was last down 0.15 per cent at 100.9.

“The dollar was obviously the big winner from the war last time. But it’s starting from a pretty different point this time, having strengthened quite a lot and there already having been a fairly lasting repricing of the Fed outlook,” said Thomas Mathews, head of markets for Asia Pacific at Capital Economics in Wellington.

“It’s not clear to me the greenback would gain as much this time if the situation continued to worsen, which I think is probably reflected in trade so far.”

Fed funds futures are pricing an implied 50 per cent probability of two or more rate hikes by the time of the US central bank’s December meeting, up slightly from Friday, according to the CME Group’s FedWatch tool.

Inflation risks are likely to remain in focus with the release of US CPI data on Tuesday, PPI gauges the following day, and Fed chair Kevin Warsh’s testimony before the House and Senate, Westpac analysts wrote in a research report.

The Japanese yen slipped against the dollar on Monday after Reuters reported that Tokyo had no imminent plans to change the asset allocations of its state pension funds.

The dollar was last up 0.2 per cent at 162.08 yen, putting traders back on alert for possible intervention from authorities in Tokyo as the Japanese currency continues to languish at 40-year lows.

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The yen and Japanese bonds had rallied on Friday after Finance Minister Satsuki Katayama said the government would seek ways to encourage pension funds, including the Government Pension Investment Fund (GPIF), to make greater investments in Japanese financial assets.

While the government is exploring ways to boost such investments within the existing allowable ranges of the benchmark portfolio, the initiative will not lead to immediate revisions to GPIF’s medium-term objectives, two government sources told Reuters.

Chris Turner, head of global markets at ING, said intervention was a prospect this week, adding that “intervention alone cannot reverse the current bull trend”.

“For that to happen, energy prices need to come lower and the Fed must conclude that it does not need to hike rates after all,” Turner said. REUTERS