US Dollar Holds Near One-Week High
The US dollar traded close to a one-week high on Tuesday. Elevated Treasury yields and continued geopolitical tensions in the Middle East supported demand for the currency.
Meanwhile, the Japanese yen fell to its weakest level against the dollar since 1986.
Dollar Index Remains Firm
The US Dollar Index held steady near 100.93. The index measures the dollar against a basket of six major developed-market currencies.
During the previous session, it reached its highest level since July 15.
Higher US bond yields continued to support the dollar. The benchmark 10-year Treasury yield traded near 4.59%, while the 30-year yield remained above 5%.
Inflation Risks Support Treasury Yields
Bond markets remain concerned that prolonged disruptions to global energy supplies could push consumer prices higher.
A fresh increase in inflation could encourage central banks to keep interest rates elevated for longer. This outlook has helped strengthen the dollar against several major currencies.
ING foreign exchange strategist Francesco Pesole said risks for the dollar remained tilted to the upside.
He noted that markets may be underestimating the economic impact of renewed military escalation in the Middle East.
Japanese Yen Falls to 40-Year Low
The Japanese yen weakened sharply against the US dollar.
The currency fell to around 162.89 per dollar, marking its lowest level in approximately 40 years.
The decline highlights the widening difference between US and Japanese interest rates. Higher Treasury yields have made dollar-denominated assets more attractive to investors.
British Pound Outperforms European Peers
The British pound performed better than several other major European currencies, rising by around 0.1%.
Sterling received support after newly appointed UK Prime Minister Andy Burnham pledged to maintain fiscal discipline and follow existing budget rules.
Investors responded positively to the government’s commitment to responsible public finances.
The pound remained relatively firm ahead of important UK wage data, which could influence expectations for future interest-rate decisions.
Euro Stabilizes Ahead of ECB Meeting
The euro edged higher to around $1.1420.
The currency traded within a narrow range as investors prepared for Thursday’s European Central Bank policy meeting.
The ECB is widely expected to leave interest rates unchanged. However, rising energy costs may prevent ECB President Christine Lagarde from signaling that rate cuts are approaching.
Persistent inflation risks could encourage policymakers to maintain a cautious position.
Middle East Conflict Drives Currency Volatility
Geopolitical tensions remained the main source of volatility in foreign exchange markets.
US Central Command said it had completed a ninth consecutive night of military strikes against Iranian command centers and maritime infrastructure.
Concerns increased further after Yemen’s Iran-aligned Houthi movement announced a naval blockade targeting Saudi Arabia.
The development created additional risks for important global oil shipping routes.
Oil Prices Swing Near Six-Week Highs
Crude oil prices moved sharply near six-week highs before giving back some gains.
Traders assessed the potential impact of the Houthi blockade alongside reports that mediators had presented Iran with a proposed 10-day ceasefire.
The temporary decline in oil prices reduced some demand for the dollar as a safe-haven asset.
As a result, the euro and British pound were able to hold relatively steady.
Federal Reserve Meeting Comes Into Focus
Investors are also monitoring several major central bank meetings.
After Thursday’s ECB decision, attention will shift to the Federal Reserve meeting next week.
Markets currently see an approximately 85% chance that the Fed will leave interest rates unchanged.
Policymakers are expected to assess whether Middle East energy disruptions could lead to another increase in inflation before changing monetary policy.
