Dollar Holds Steady as US–Iran Tensions Rise and Yen Weakens
The U.S. dollar traded slightly higher on Monday as tensions in the Gulf intensified. However, investors remained cautious ahead of the latest U.S. inflation data.
Meanwhile, the Japanese yen weakened after reports suggested that Japan does not plan to make immediate changes to the asset allocation of its state pension funds.
US Announces Renewed Naval Blockade on Iran
U.S. President Donald Trump said on Monday that the United States would reinstate a naval blockade against Iran.
According to Trump, the operation would begin immediately. However, he did not provide further details about how the blockade would be implemented.
The announcement added to concerns about a broader military escalation in the Middle East.
Dollar Trades Mostly Flat
The dollar index, which measures the U.S. currency against six major rivals, rose by just 0.04% to 101.11.
The dollar initially strengthened alongside oil prices during the session. However, it later gave up most of those gains as traders avoided large positions before key economic events.
The euro declined by 0.1% to $1.1402. At the same time, the British pound fell by 0.24% to $1.3370.
The Australian dollar also weakened, losing 0.27% to trade near $0.6931.
US and Iran Exchange Missile and Drone Attacks
Geopolitical risks increased after U.S. and Iranian forces exchanged heavy missile and drone attacks over the weekend.
Tehran reportedly targeted U.S. facilities across several Gulf states on Sunday. Iranian authorities also claimed that they had once again closed the Strait of Hormuz.
The shipping route is crucial for global energy markets because a significant share of the world’s oil supplies passes through it.
Oil Prices Jump on Supply Concerns
Oil prices climbed sharply as investors considered the risk of supply disruptions in the Gulf.
Brent crude futures rose by 4.39% to $79.32 per barrel.
Higher oil prices could also increase inflationary pressure, making upcoming U.S. economic data even more important for financial markets.
US Inflation Data Takes Centre Stage
Investors are now focusing on the U.S. Consumer Price Index report, which is scheduled for Tuesday.
The Producer Price Index will follow on Wednesday. In addition, Federal Reserve Chair Kevin Warsh is expected to testify before both the House and Senate.
Westpac analysts said inflation risks would probably remain a major concern throughout the week.
Joel Kruger, a market strategist at LMAX Group, said investors were balancing renewed geopolitical uncertainty against their reluctance to take significant risks before the inflation report and Federal Reserve testimony.
These events could provide markets with a clearer direction and may lead to higher volatility after Monday’s cautious trading.
Markets Price in Possible Fed Rate Increases
Federal funds futures currently indicate approximately 30 basis points of interest-rate increases from the Federal Reserve this year, according to LSEG data.
However, some analysts believe the threshold for a July rate decision remains high.
Marc Chandler, chief market strategist at Bannockburn Capital Markets, said ongoing volatility in the Middle East had reduced market conviction.
As a result, major currencies continued to trade mostly sideways.
Yen Falls on Pension Fund Reports
The Japanese yen declined against the dollar after Reuters reported that Tokyo had no immediate plans to adjust the asset allocations of state pension funds.
The dollar rose by approximately 0.42% to 162.37 yen.
The move placed traders on alert for possible intervention by Japanese authorities, especially as the yen remains close to its weakest level in around four decades.
Japan Considers Greater Domestic Investment
The yen and Japanese government bonds had strengthened on Friday after Finance Minister Satsuki Katayama discussed ways to encourage pension funds to invest more heavily in Japanese assets.
These funds include the Government Pension Investment Fund, one of the largest pension funds in the world.
The government is reportedly examining ways to increase domestic investment within the existing limits of the fund’s benchmark portfolio.
However, government sources said the initiative would not result in an immediate revision of the fund’s medium-term investment objectives.
Interest Rates Remain Critical for the Yen
Marvin Loh, senior global market strategist at State Street, described Japan’s proposed measures as insufficient.
He suggested that the yen could remain near its current levels unless policymakers take stronger action. In particular, higher Japanese interest rates may be necessary to provide lasting support for the currency.
For now, currency markets are likely to remain sensitive to developments in the Middle East, oil prices, U.S. inflation data and signals from the Federal Reserve.
