By Laura Matthews
NEW YORK, July 13 (Reuters) – The dollar clung to modest gains on Monday, underpinned by escalating hostilities in the Gulf and hawkish comments from a Federal Reserve governor ahead of the monthly U.S. inflation report.
The yen slid following a Reuters report Japan had no immediate plan to change state pension funds’ asset allocations.
President Donald Trump said on Monday the U.S. was reinstating a naval blockade on Iran and would ensure the Strait of Hormuz stays open for a fee following fresh exchanges of missile and drone strikes.
Later, Federal Reserve Governor Christopher said rates may need to rise “in the near term” if data shows inflation remaining well above the central bank’s 2% target.
The dollar index, which tracks the currency against six peers, rose 0.21% at 101.27. The U.S. currency rose earlier in the session along with oil prices but later lost ground.
The euro fell 0.26% to $1.1383 and sterling was down 0.40% at $1.3352, while the Australian dollar weakened 0.47% to $0.6917.
U.S. and Iranian forces exchanged heavy missile and drone assaults at the weekend, with Tehran targeting U.S. facilities in states across the Gulf on Sunday and saying it had again closed the vital Strait of Hormuz shipping route.
Oil prices rose more than 9% to a one-month high, with Brent crude futures settling at $83.30 a barrel.
“With renewed escalation in the Middle East over the weekend and into this Monday morning, markets are reacting with a mild risk-off tone,” said John Velis, Americas macro strategist at BNY. “Investor positioning suggests more room to add USD positions should fundamentals move toward a stronger dollar.”
INFLATION IN FOCUS, YEN SLIDES
Inflation risks remain in focus with the release of U.S. CPI data on Tuesday, PPI gauges the following day, and Fed Chair Kevin Warsh’s testimony before the House and Senate.
“Expectations are that CPI will continue to benefit from the fall in oil prices and limited pass through into core is also keeping volatility nicely wrapped,” said said Marvin Loh, senior global market strategist at State Street in Boston. “The biggest pushback is higher yields again, and equity volatility, which is again within ranges, but pushing into the edges of those bands.”
Fed funds futures are pricing in about 30 basis points of rate hikes by the U.S. central bank this year, according to LSEG data.
The Japanese yen slipped against the dollar on Monday after Reuters reported that Tokyo had no imminent plans to change the asset allocations of its state pension funds.
