The dollar has recorded two consecutive sessions of decline due to the attacks between the U.S. and Iran, while the U.S. labor market remains solid and the Fed debates interest rate hikes.
The U.S. dollar closed on Thursday with its second consecutive day of losses, pressured by the escalation of hostilities between the United States and Iran and by the strength of the labor market, which keeps doubts about inflation and the Federal Reserve's next steps alive. The dollar index, which measures the greenback against a basket of currencies, fell by 0.09%, to 100.93 points.
Cross attacks and contained oil
Iranian forces launched attacks against U.S. military infrastructure in neighboring Gulf countries, in response to previous U.S. offensives in southern and eastern provinces of Iran. This escalation has weakened the ceasefire agreement reached just three weeks ago, generating uncertainty in financial markets.
Despite the initial surge, oil prices moderated. West Texas Intermediate crude fell by 0.99%, to $72.79 per barrel, while Brent stood at $77.56, down 0.59%. Investors are assessing the risk of a prolonged escalation in the Middle East, although for now the impact on energy prices seems limited.
Erik Bregar, director of currency and precious metals risk management at Silver Gold Bull in Toronto, summarised the atmosphere:
“One could say there is a lot of confusion. It could be argued that, given this sideways movement in prices, the market is trying to decipher what the reality is, but unfortunately we are going to operate based on the tone of the next headline.”
The Fed, between inflation and employment
The minutes from the Federal Reserve's meeting on June 16 and 17 — the first under the chairmanship of Kevin Warsh — reflected growing concern over high inflation. Some participants considered that there were arguments for an immediate interest rate hike. However, expectations for a 25 basis point increase at the meeting on July 28 and 29 moderated to 24.1%, down from 31% in the previous session, although still above the 18.2% from a week ago, according to CME Group's FedWatch tool.
For the September meeting, markets are pricing in a 63.5% probability of a hike, slightly lower than the 66.6% on Wednesday, but higher than the 54.1% from last week. The stability of the U.S. labor market is key: initial jobless claims fell by 2,000 to 215,000, below the 218,000 estimated by analysts surveyed by Reuters.
The president of the Federal Reserve Bank of New York, John Williams, stated that despite the resumption of hostilities in the Middle East, he does not foresee a sustained increase in energy prices for the remainder of the year. His statements aim to calm fears that geopolitical tension could spike inflation and force a more aggressive response from the central bank.
Currencies: euro, yen, and pound up
The euro gained 0.17% to $1.1434, while the British pound rose 0.05% to $1.3391, after reaching a new three-week high of $1.343. Against the Japanese yen, the dollar depreciated by 0.15% to 162.31 units.
The Bank of Japan noted that the conflict with Iran could push more Japanese companies to raise their prices by the end of the year, reinforcing arguments for further rate hikes in Japan. In Europe, the minutes from the European Central Bank released on Thursday showed that monetary policymakers received projections placing inflation above target until next year, despite the tightening of interest rates.
For Spanish investors, the weakness of the dollar makes imports of crude and other products denominated in U.S. currency cheaper, which may alleviate imported inflation. However, geopolitical uncertainty remains the main focus of attention. Markets will be watching for any new developments in the Middle East and upcoming macro data, especially the June employment report to be released on Friday.
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