SINGAPORE (Reuters)
The dollar saw support on Thursday amid increasing demand for safe havens, triggered by escalating tensions in the Middle East and potential U.S. involvement. Investors seemed to overlook Federal Reserve Chairman Jerome Powell’s cautious remarks regarding inflation.
After a relatively calm beginning in the Asian markets, the dollar firmed up against risk-sensitive currencies, particularly following reports that U.S. officials are preparing for a possible strike on Iran soon.
The Australian dollar dipped by 0.5%, settling at $0.6489, while the New Zealand dollar also fell by 0.5% to $0.5998. Emerging market currencies faced challenges as well, with the Korean won losing nearly 1%.
Heightened geopolitical tensions have reignited safe-haven demand, impacting currencies like the yen, euro, and Swiss franc.
The ongoing conflict between Iran and Israel intensified with additional airstrikes on Thursday, marking the seventh day of conflict. Concerns are growing about possible U.S. involvement, especially as President Trump has speculated about military actions concerning Iranian nuclear sites.
This situation has raised fears of broader instability in the region, exacerbated by the ongoing effects of the Gaza War.
Some analysts noted that investors might be trying to cover their short dollar positions. “The dollar seems ripe for a short cover rally, especially with the U.S. deeply involved in the Middle East,” commented Matt Simpson, a senior analyst at City Index.
According to Christopher Wong, a currency strategist at OCBC, geopolitical worries seem to overshadow the recent Federal Open Market Committee (FOMC) outcome. He mentioned, “Risk aversion controls emotions, which puts pressure on risk-sensitive FX.”
The U.S. markets were closed on Thursday due to federal holidays in June, resulting in lower liquidity levels.
The euro fell to a weekly low, losing 0.25% to $1.1455, heading toward an overall drop of 0.8% for the week. The yen was last priced at $145.13.
The dollar index, which tracks the currency against six others, rose by 0.11% to 99, marking a weekly gain of approximately 0.9%, its strongest performance since late January.
Powell’s Warning
While the Fed’s actions have been stable, there are expectations of interest rate cuts this year, although not everyone agrees on the necessity of such cuts.
Powell suggested that commodity price inflation might recover over the summer, particularly as tariffs instituted by Trump start impacting consumers. “In the end, the tariffs will have to be paid, and some of them will fall to the final consumer,” he said during a press conference. This reflects the views of companies as well as historical data.
His comments underline the challenges that policymakers face as they navigate uncertainties caused by tariffs and geopolitical issues, leading to market concerns about the path of U.S. interest rates.
Traders are anticipating at least two rate cuts this year, although analysts are uncertain about where they will begin. An ING economist noted expectations for a 25 basis point rate cut possibly in September and December, but the September FOMC might consider it too early for a significant reduction.
Ray Sharma Ong, from Aberdeen Investments, suggested that this year might not see any cuts at all, given uncertainties surrounding trade policies and the economic outlook.
The British pound traded down 0.14% at $1.3403 ahead of a policy decision from the Bank of England, where it is expected the central bank will maintain its current stance.
The Swiss franc was last valued at 0.81995 per dollar as it approached decisions from the Swiss National Bank, while Norway’s central bank is also expected to make policy announcements later that day.
