The dollar climbed to a two-week high on Wednesday as investors sought safety amid a fresh U.S.-Iran military exchange and diverging central bank paths. The euro slipped to its lowest level since August 20, while the yen strengthened as traders weighed Bank of Japan rate expectations.
The U.S. and Iran returned to a war footing on Wednesday after their most significant exchange of fire in weeks, pushing investors toward the dollar. The greenback tends to benefit from higher oil prices because the U.S. economy is less exposed to energy shocks than other major economies, drawing demand away from currencies such as the euro and yen.
Euro slides as rate paths diverge
The dollar index rose 0.11% to 99.76, after touching 99.808, its highest point since August 17. The euro, in turn, fell 0.16% to $1.1575, after hitting $1.1570, its lowest since August 20.
Most economists expect the European Central Bank to be near the end of its tightening cycle after next week's widely anticipated rate hike. The Federal Reserve, however, faces a growing risk of having to tighten policy in 2027. George Brown, senior economist at Schroders, said Schroders expects a wider rate gap in the dollar's favor and is positioned for the euro to fall to $1.10 against the dollar by year-end.
A selloff in U.S. Treasuries, however, can weigh on the dollar, as concerns about inflation and the country's fiscal trajectory raise doubts about the long-term appeal of U.S. assets. The yield on the benchmark 10-year note rose to as high as 4.812%, its firmest since November 2023, before retreating to 4.804%. Markets are now pricing a 70% chance of a September Fed hike, up from around 40% a week earlier, according to CME Group's FedWatch tool.
Yen firms below 160 per dollar
The yen rose 0.45% against the dollar to 159.50, after earlier weakening to its lowest since July 31, staying just above the psychologically important 160-per-dollar threshold. Bank of Japan governor Kazuo Ueda said consecutive rate hikes could be a possibility, while U.S. Treasury Secretary Scott Bessent voiced support for decisive monetary steps to combat yen weakness in talks with Ueda.
A rare joint U.S.-Japan intervention at the end of July had pulled the yen away from a 40-year low of 163.99, but the currency has since given back around half those gains. Market analyst Tony Sycamore of IG said another coordinated intervention looks unlikely until tensions in the Strait of Hormuz ease.
Elsewhere, the New Zealand dollar slumped 1.01% to $0.5844, its lowest since August 13, even after the country's central bank raised its official cash rate by 25 basis points to 2.75%, a move analysts viewed as less hawkish than expected.
Source: Economy News
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