Key facts
- The dollar held steady as markets remained on edge over U.S.-Iran tensions and awaited key U.S. inflation data.
- The U.S. military struck Iranian targets following Iran's alleged downing of a U.S. Apache helicopter.
- Investors are awaiting U.S. consumer price index data for clues on the Federal Reserve's rate path.
- Stronger-than-expected U.S. jobs data has increased expectations for a Federal Reserve rate hike.
- The Bank of Japan's June rate hike is almost fully priced in, with commentary from Governor Ueda being key for future moves.
- The European Central Bank is widely expected to implement a 25-basis-point rate hike on Thursday.
The dollar held steady against its peers on Wednesday as markets remained on edge over the latest clash between the U.S. and Iran, while investors awaited key U.S. inflation data for clues on the Federal Reserve's rate path. The U.S. military struck Iranian targets after President Donald Trump vowed on Tuesday to respond to the downing of an Apache attack helicopter, a fresh escalation that threatens to unravel a fragile ceasefire between Washington and Tehran. Iran's Revolutionary Guards said they had carried out attacks against a U.S. base in Jordan and 21 other targets in the Gulf on Wednesday in retaliation for American strikes around the Strait of Hormuz, Iranian media reported.
Some analysts, however, said the latest exchange did not yet signal a dramatic escalation in the conflict. Despite the tensions and the lapse in the ceasefire over the weekend, "we continue to assess the war to be on a de-escalatory path," said Harry Ottley, an economist at Commonwealth Bank of Australia.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, edged 0.06% lower to 99.95. The euro was up 0.01% at $1.1544, while sterling gained 0.03% to $1.338. The U.S. economy is relatively insulated from energy shocks when compared with its peers, a factor that has supported safe-haven demand for the dollar during the U.S.-Iran conflict, while weighing on the euro and Japanese yen.
Meanwhile, a Bank of Japan rate hike at the June 16 policy meeting is now almost fully priced in, meaning it is unlikely on its own to trigger a significant reversal in yen weakness if delivered. "It's going to take some hawkish commentary from Governor (Kazuo) Ueda that signals the BOJ could bring forward its next hike from December to September - with the possibility of a third hike before year-end," said Tony Sycamore, market analyst at IG. "Without that or something similar, the Ministry of Finance will likely need to pull out its cheque book again to defend the currency." The Japanese yen was up 0.01% against the greenback to 160.34 per dollar, continuing to hover around the 160 level that is widely viewed as a line in the sand for official intervention.
Data on Wednesday showed Japan's wholesale inflation accelerated to a three-year high of 6.3% in May from a year earlier, as price pressures from the Middle East war broadened. Later on Wednesday, the U.S. will release consumer price index data for May, which is seen as crucial in gauging whether the Fed might lean toward rate hikes later this year following last week's stronger-than-expected jobs report. "If inflation accelerates this time, expectations for further rate hikes are likely to strengthen, pushing the dollar higher," said Sho Suzuki, a market analyst at Matsui Securities. "More broadly, with oil prices staying elevated, the underlying backdrop is likely to remain supportive of the dollar ... Overall, conditions will continue to favour flows into the dollar." Solid growth and persistent inflation are likely to keep expectations tilted toward further U.S. rate hikes, even as any potential U.S.-Iran deal could offer some relief. Markets will also be watching the European Central Bank's upcoming policy meeting on Thursday, where a 25-basis-point rate hike is widely expected.
The risk-sensitive Australian dollar lost 0.16% versus the greenback to $0.717. The kiwi edged 0.05% lower versus the greenback to $0.5813.