Asian currencies and the U.S. dollar showed little net movement on Wednesday as fresh hostilities between the United States and Iran weighed on hopes for an early peace settlement, and traders awaited a key U.S. inflation print that could shape expectations for Federal Reserve policy.
The U.S. Dollar Index was essentially flat as of 00:46 ET (04:46 GMT), but it remained in the vicinity of a two-month peak reached earlier in the week.
Geopolitical flare-up lifts oil and keeps markets cautious
Tehran said on Wednesday it had struck U.S. bases in Jordan and in several Gulf states in retaliation for U.S. strikes on Iranian military positions near the Strait of Hormuz. The exchange heightened concerns about potential disruptions to oil shipments and pushed crude prices higher, stoking anxiety that energy-driven inflation pressures could stay elevated across world markets.
Regional FX moves
- The onshore Chinese yuan was little changed versus the dollar, with USD/CNY trading largely flat.
- South Korea's won saw USD/KRW tick up about 0.1%.
- India's rupee and the Singapore dollar each moved about 0.1% the other way, with USD/INR and USD/SGD both edging down 0.1%.
- The Australian dollar slipped roughly 0.2% against the dollar.
- Japan's yen was broadly steady. Separately, data showed Japan's producer prices rose 6.3% year-on-year in May, a figure that exceeded expectations and reinforced views that the Bank of Japan could continue on a path of monetary policy normalisation at its upcoming meeting.
All eyes on U.S. CPI
Markets were focused on the U.S. consumer price index due later on Wednesday, a release investors expect will provide new information about the trajectory of U.S. interest rates. A stronger-than-expected inflation reading could bolster expectations that policy rates will stay higher for longer, lending support to the dollar amid the geopolitical backdrop.
"A hot inflation print would reinforce 'higher-for-longer' US rate expectations, supporting broad USD strength, particularly with the US-Iran conflict showing no signs of a swift resolution," MUFG analysts said in a note.
Futures pricing shows markets have largely priced in at least one Fed rate hike this year, according to the CME FedWatch tool.
For now, currency markets in the region exhibited limited directional conviction as the twin influences of geopolitical risk and an upcoming U.S. inflation report kept traders cautious. The next moves in FX markets are likely to hinge on the CPI outcome and any further developments in the Middle East that could affect energy supply and inflation expectations.