Dollar extends gains on renewed Middle East attacks
Oil prices surge, reinforcing inflation concerns
Yen weakens further, moving closer to intervention levels
Wall Street stays driven by geopolitics and earnings
Iran releases attack footage, Trump ramps up threats
The US dollar extended its gains against all its major peers on Thursday, heading for its first weekly gain in three weeks as uncertainty surrounding the Middle East remains elevated. Today, the greenback remains strong, but it seems to have calmed somewhat.
Following Trump’s indefinite ceasefire extension, Lebanon and Israel extended their own truce for another three weeks ahead of its expiration on Sunday. That said, with the US and Iran at an impasse over the Strait of Hormuz and remaining unwilling to resume negotiations, the dollar stood tall as additional increases in oil prices continued to add to anxiety about stickier inflation down the road.
Yesterday, just a day after Iran shot at three ships near Hormuz, they released footage of commandos storming a huge cargo ship, with US President Trump responding that he ordered the US navy to "shoot and kill" Iranian boats near the strait.
High oil prices weigh on Fed rate cut bets
WTI crude oil emerged above $100 again to hit resistance at around 101.25, and although it pulled back slightly, it remains close to the $100 zone. Elevated oil prices for a prolonged period could further weigh on Fed cut expectations, thereby driving Treasury yields and the US dollar higher.
Indeed, both the 2-year and 10-year yields have been drifting higher as investors are now seeing a mere 20% chance of a 25bps reduction in borrowing costs by the end of the year. The Fed holds its monetary policy gathering next week and hints suggesting that officials may be skeptical about whether a rate cut could be delivered this year could add more fuel to the dollar’s engines. Perhaps they may suggest pushing the timing of additional cuts into 2027 amid renewed inflation worries. After all, an imminent and permanent truce appears less likely now than it did a few days ago.
Intervention warnings return ahead of BoJ decision
The BoJ will also hold its monetary policy decision next week and yen traders may be eagerly waiting for clues on how the Bank is planning to move forward, especially after the likelihood of a rate hike this month faded.
Dollar/yen rose yesterday, getting closer to the round figure of 160.00, prompting Finance Minister Katayama to reiterate her intervention warnings, saying that they can take “decisive” action against speculative moves in the FX market.
Although the BoJ is now expected to stand pat next week, most market participants believe that policymakers will deliver hawkish signals, remaining ready to lift interest rates higher to battle elevated price pressures. That said, although the Nationwide CPI measures accelerated in March, they remain below the Bank’s objective of 2% and thus, less-hawkish- than-expected communication on Tuesday could very well deepen the yen’s wounds and perhaps trigger actual intervention by Japanese authorities.
Wall Street gaze on geopolitics and earnings, gold holds near support
On Wall Street, all three of its main indices slid amid the uncertainty surrounding the Middle East developments, with the tech-heavy Nasdaq losing nearly 0.90% after it hit a new record high. That said, futures are suggesting a slightly higher open for the index today.
It seems that stock investors are caught between a rock and a hard place these last couple of days. On the one hand, the risk of re-escalation in tensions between the US and Iran and concerns about sticky inflation may be negative variables, but on the other, stronger-than-expected earnings results are reason for celebration.
For now, the outlook continues to look positive and more upbeat company results could tempt investors to further increase their risk exposure. Nonetheless, a severe breach of the US-Iran ceasefire and aggressive attacks could risk changing that.
Gold traded slightly lower, weighed down by the rise in Treasury yields and the strength of the US dollar. Still, the precious metal remains above the key support zone of $4,640 but should things in the Middle East get out of control, the bears could find the strength and push the action lower.