The dollar index (DXY00) is up by +0.06% today. The dollar is slightly higher today as the escalation of hostilities between the US and Iran is boosting crude oil prices, which raises inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar. Higher T-note yields today have also strengthened the dollar’s interest rate differentials. Today’s rally in stocks has curbed liquidity demand for the dollar, limiting gains in the currency.
The US and Iran exchanged strikes for a 10th consecutive day as mediators sought to revive a truce, with the US targeting military command centers, launch sites and air defenses in Iran and Iran attacking US military sites in Kuwait and Jordan. The UK navy also reported today that Iran struck two vessels around the Strait of Hormuz.
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The swaps markets are discounting the odds at 18% for a +25 bp rate hike at the next FOMC meeting on July 28-29.
EUR/USD (^EURUSD) is down by -0.01% today. The euro is slightly lower today amid a stronger dollar. Also, today’s +2% increase in crude oil prices to a 5-week high is negative for the Eurozone economy and the euro, as Europe imports most of its energy. However, losses in the euro are limited after the German Jul ZEW survey expectations of economic growth rose more than expected to a 5-month high.
The German Jul ZEW survey expectations of economic growth rose +15.8 to a 5-month high of 26.3, stronger than expectations of 15.3.
The markets are discounting a +4% chance of a +25 bp rate hike by the ECB at its next policy meeting on Thursday.
USD/JPY (^USDJPY) is up by +0.25% today. The yen tumbled to a new 39-year low against the dollar today. Today’s +2% increase in crude oil prices to a 5-week high is pressuring the yen, as it is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy. Also, higher T-note yields today are weighing on the yen. In addition, today’s +3% jump in the Nikkei Stock Index has reduced safe-haven demand for the yen.
The risk of intervention in currency markets to support the yen is high, as the yen remains firmly above 160 per dollar at a 39-year low. Japanese authorities have intervened in the forex market several times in the past when the yen surpassed that level.
