US dollar rises to 2-week high; Middle East conflict and rate paths in focus
The greenback tends to benefit from higher oil prices
Add BT as a preferred source
[LONDON] The US dollar hit a two-week high on Wednesday (Sep 2) as investors turned to the currency amid growing concerns about the economic impact of the energy shock and weighed diverging monetary policy paths across major economies.
Iran and its Arab neighbours were plunged back into war on Wednesday by the biggest exchange of fire between Teheran and Washington since July.
The greenback tends to benefit from higher oil prices because the American economy is less exposed to energy shocks than many other major economies, attracting demand at the expense of currencies such as the euro and yen.
While most economists expect the European Central Bank (ECB) to be near the end of its tightening cycle after next week’s widely anticipated rate hike, the Federal Reserve is confronting a growing risk of having to tighten policy in 2027.
“We expect the ECB to finish its hiking cycle by the end of the year, while the Federal Reserve will likely be just beginning to raise rates,” said George Brown, senior economist at Schroders.
“That should widen rate differentials in favour of the dollar and lead to a weaker euro,” he added, flagging that Schroders is positioned for a softer euro and expects the single currency to fall to US$1.10 against the dollar by year-end.
However, a sell-off in US Treasuries driven by concerns about inflation and the country’s fiscal trajectory can weigh on the greenback, as rising debt levels and persistent price pressures raise doubts about the long-term appeal of US assets.
The dollar index rose 0.20 per cent to 99.865, its highest point since Aug 17. The euro was down 0.16 per cent at US$1.1575, after hitting US$1.1566, its lowest since Aug 20.
The yield on the benchmark US 10-year note rose to as high as 4.8182 per cent, its firmest since November 2023. Japan’s benchmark 10-year yield extended its rally to 3.01 per cent on Wednesday after reaching a three-decade milestone of 3 per cent on Tuesday.
Markets are now pricing in a 68 per cent chance of a September Fed hike, up from around 40 per cent a week earlier, according to CME Group’s FedWatch tool.
The yen rose 0.25 per cent against the greenback to 159.89 per dollar, right above the psychologically important 160- threshold, as markets weigh the Bank of Japan’s (BOJ) rate path.
BOJ Governor Kazuo Ueda said that consecutive rate hikes could be a possibility.
Kit Juckes, strategist at Societe Generale, noted hawkish comments from BOJ board member Hajime Takata. “This is helping the yen, regardless of concerns about the impact of rising energy prices on the growth outlook and what this means for debt sustainability,” he said.
“Tactically, the wise move may be to look for the yen to rally from here to the meeting on Sep 18, but to sell it quite soon afterwards unless the underlying economic data surprise on the upside,” he added.
A rare joint intervention by the US and Japan at the end of July provided short-lived relief for the fragile yen, pulling it away from the 40-year low of 163.99, but the currency has since surrendered around half of the gains from the joint action.
The New Zealand dollar slumped 1.01 per cent against the greenback to US$0.5844, its lowest point since Aug 13, even after the country’s central bank raised rates but stressed any further moves would be measured, as it warned of mounting risks to the economic outlook. REUTERS
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Sign up here to get Decoding Asia newsletter. Delivered to your inbox. Free.
Share with us your feedback on BT's products and services
