Currency trading in Asia was subdued on Tuesday as market participants balanced geopolitical developments related to the Iran war against a set of major central bank decisions that begin with the Reserve Bank of Australia later in the day.
The euro traded 0.12% lower at $1.1492 during Asian hours, and sterling pulled back 0.1% to $1.33 after a bout of stronger performance in the previous session. The dollar index was little changed at 99.913, reflecting a broadly steady greenback as investors reassessed the outlook for energy markets and interest rates.
Sentiment was dented after several American allies declined U.S. President Donald Trump’s request to send warships to escort oil tankers through the Strait of Hormuz. That rebuff raised new doubts about how soon energy flows might normalize, and fed renewed concern about surging oil prices linked to the U.S. and Israel’s war on Iran.
Those higher oil prices have increased investor anxiety about inflation and prompted rapid adjustments in rate expectations around the world, a dynamic that has generally supported the U.S. dollar against most currencies.
Attention shifted to the RBA meeting that begins in the Asia-Pacific session. Markets were pricing in roughly a 78% chance of a 25-basis-point increase in rates, and the Australian dollar eased 0.16% to $0.706. The New Zealand dollar also slipped, down 0.24% at $0.5848.
"The policy response to the crisis will begin to crystallise in the coming days" with market pricing moving to reflect either imminent hikes or at least less easing than was expected prior to the crisis, said Kyle Rodda, a senior analyst at capital.com. He added that policy uncertainty has risen and that there will likely be division among central bankers about whether policy should respond to a supply shock or look past it.
The RBA meeting opens a sequence of central bank gatherings this week that investors will scrutinize for clues on how policymakers assess the war's effects on inflation and growth.
One of the more pronounced moves in the currency complex came in the Japanese yen, which weakened to 159.35 per dollar, approaching but remaining just under the psychologically important 160 level despite verbal warnings from Japanese authorities on Tuesday. Analysts noted that the threshold for intervention may have risen because of the influence of higher oil prices.
The yen has fallen by more than 2% against the dollar since the war began at the end of February. "While the sharp rise in the oil price is helping drive a bid for USDs, the yen is coming under pressure simply because high oil prices and Japan’s heavy reliance on energy imports risks stoking inflation and a significant deterioration in its trade balance," said Prashant Newnaha, senior rates strategist at TD Securities. "At some point authorities will need to determine whether to protect the yen or the bond market. They can’t have both."
Markets will remain focused on how central banks navigate the trade-off between addressing supply-driven inflationary pressure and maintaining broader financial stability as developments in the Middle East and energy markets continue to evolve.