Dollar softer as oil slumps on pause in Middle East conflict
FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo
NEW YORK, July 27 : The dollar eased against major currencies on Monday as a pause in U.S. bombing in Iran sent oil prices lower and lifted risk appetite ahead of a busy week of central bank meetings.
The euro rose 0.1 per cent to $1.1374, while the U.S. dollar slipped 0.1 per cent to 163.69 yen. The pound pared early gains to trade about 0.1 per cent lower at $1.3308.
Riskier assets rebounded and oil prices sank, with Brent crude tumbling 7.5 per cent to $89.42 per barrel after the U.S. military temporarily halted its two-week-long strikes. Tehran said it would also halt attacks if the U.S. maintained the pause, raising hopes for renewed diplomatic efforts to de-escalate the conflict.
Still, the dollar was off the day's lows as the retreat in U.S. yields, which move in the opposite direction of bond prices, fell short in comparison to the drop in yields in other markets, offering support to the U.S. currency.
"While USD is down on the day, it has been shifting higher in the day as U.S. rates have rallied by less than those in the rest of the world," Benjamin Ford, researcher at macro research and strategy firm Macro Hive, said.
"Overall, that leaves you in a state where the market needs to put front-end rates pricing up against risk premium," Ford said.
The dollar's softer tone comes ahead of the Federal Reserve's July 28 to 29 policy meeting.
With new Fed Chair Kevin Warsh providing few clues on the policy outlook, traders see a roughly 33 per cent chance of a quarter-point Fed rate hike on Wednesday, down from 37 per cent at the end of last week but double the probability seen a week ago, according to CME Group's FedWatch tool.
"It could be that the market is not particularly well-informed after this meeting because Warsh doesn't like to give forward guidance, and there is so much uncertainty, particularly with respect to how long the Iran war will last," said Jane Foley, head of FX strategy at Rabobank.
Investors will also look to U.S. second-quarter GDP data and the Fed's preferred inflation gauge, core PCE inflation, this week for more clues on the health of the world's biggest economy.
POLICY UNCERTAINTY
The Bank of England and Bank of Japan are widely expected to keep interest rates unchanged at their meetings on Thursday and Friday, respectively, while maintaining a cautious stance on inflation.
With the yen pinned near last week's 40-year lows against the dollar, the Bank of Japan is expected to leave the door open to further hikes to arrest the currency's decline, although policymakers will likely stay ambiguous on the pace and timing of the moves. Verbal efforts to support the Japanese currency have so far yielded muted results.
"The MoF's intervention window looks increasingly like it has passed," Ford said.
"They need concrete evidence the USD top has been found," added Ford, who sees the risk of intervention beginning to climb once it has become clearer that oil is also shifting lower.
Sterling was modestly weaker on the day ahead of Thursday's BoE meeting. The central bank faces renewed inflation risks from higher oil prices, just days after new Prime Minister Andy Burnham and Finance Minister John Healey took office.
In cryptocurrencies, bitcoin was about flat on the day at $64,463.
