US dollar near one-month low as concerns over oil prices remain subdued

[LONDON] The US dollar hovered near its one-month low on Thursday (Jul 16) as investors weighed subdued US inflation data, which dampened rate-hike expectations, against the risk of a further oil price spike that could support the greenback.

US Treasury yields fell on Wednesday after a second consecutive day of data pointed to moderating inflation pressures, undermining expectations for a Federal Reserve tightening move and support for the greenback.

The American economy is less exposed to energy shocks than many of its peers, helping attract safe-haven flows into the dollar when oil prices rise, often at the expense of the euro and yen.

But diplomatic breakthroughs in the Middle East tend to weaken the greenback against both currencies, as lower oil prices improve the outlook for energy-importing economies.

Some investors said the renewed hostilities between the US and Iran were intended to gain leverage in negotiations aimed at turning an interim deal into a lasting peace, and that the situation could ultimately be de-escalated if or when the US secures a stronger negotiating position.

However, Arend Kapteyn, an economist at UBS, said that China’s import compression had been crucial and would remain key to stabilising oil markets.

“Chinese import volumes have fallen by 42 per cent since March,” she said. “June’s data suggests that even as shipping conditions through the (Strait of Hormuz) improved, before the latest escalation, China showed little urgency to rebuild inventories.”

Oil prices turned lower on Thursday as traders took profits while assessing the risks from a new wave of US strikes on Iranian military installations.

The dollar index, which tracks the American currency against six peers, was little changed at 100.5, hovering near its lowest since Jun 18. It has fallen 0.8 per cent over the previous two sessions and is on track for a weekly decline.

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Chances for a Fed hike in July were cut to 11 per cent, versus a 45 per cent implied probability at the start of the week. Markets still see even odds of at least a 25-basis-point increase in September, according to Fed funds futures prices via CME Group.

The euro was little changed at US$1.1469.

Investors are monitoring European gas futures, which have risen to their highest levels since March, stoking concerns that higher energy costs could weigh on the eurozone economy and limit further appreciation of the euro.

The European Central Bank (ECB) is seen as more hawkish than the Fed, with markets betting on two additional rate hikes into 2027, and some economists not ruling out a first move next week.

“Some ECB officials might actually be inclined to push more forcefully for another rate hike,” Carsten Brzeski, global head of macro at ING, said, after mentioning the renewed escalation in the Middle East.

Sterling held near a two-month high at US$1.354, little changed after economic data, with investors expecting that Britain’s incoming prime minister will pick a fiscally conservative finance minister.

The yen hovered near multi-decade lows, with attention on potential moves by Japan’s Government Pension Investment Fund (GPIF).

This came after Finance Minister Katsunobu Kato said last week that the government wants a “substantial” increase in domestic asset investment.

The greenback rose 0.10 per cent to 162 yen. It hit a multi-decade high at 162.84 yen early this month.

“GPIF’s discussion signals that official-sector capital allocation is becoming an active policy tool rather than a long-term aspiration,” said Geoff Yu, senior EMEA macro strategist at BNY.

“Investors should treat this as the start of a multi-year structural theme, extending well beyond Japan,” he added.

Analysts said the GPIF has the greatest capacity among Japanese investors to influence the forex market. GPIF conducts a strategy review every five years and completed its latest one in 2025. However, it can still adjust its holdings within its target allocation bands.

The Australian and New Zealand dollars were both down about 0.1 per cent, at US$0.6995 and US$0.5842, respectively. REUTERS