Dollar rises, yen falls on fading US rate-cut bets

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• Pound stabilizes with significant weekly gain amid escalating Middle East tensions and expectations of sustained high U.S. interest rates.
• Dollar’s 1.6% rise against major currencies attributed to doubts on U.S. rate cuts after slight inflation uptick, while European hints of cuts add to the mix.
• Iran’s symbolic weekend attack on Israel minimally impacts currency markets, overshadowed by investors’ focus on Fed’s rate trajectory amidst geopolitical tensions.

As tensions rise in the Middle East, the pound strengthens on expectations of sustained U.S. interest rates, while the dollar’s surge underscores investor uncertainty.

OUR TAKE
The news adeptly illustrates how geopolitical tensions and monetary policy uncertainties can profoundly influence currency markets. It serves as a reminder of the intricate connections between global events and financial stability, urging vigilance and adaptability in navigating such complexities.
–Tilly Lu, BTW Reporter

Dollar’s resilience amid global uncertainty

The pound stabilised on Monday, maintaining its most significant weekly increase since 2022, as escalating tensions in the Middle East and expectations of persistent high U.S. interest rates provided support.

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Last week, the pound rose by 1.6% against a basket of six major currencies after a slight but unsettling uptick in U.S. inflation cast doubt on expectations of U.S. interest rate cuts, while European policymakers hinted at a cut in the coming months.

The pound reached a 34-year peak against the yen, climbing to 153.69. It hit a five-month high against the euro on Friday and traded close to those levels early in the Asian session, buying a euro for $1.0646.

Impact of geopolitical events on currency markets

The initial currency market reaction appeared to be more influenced by fading expectations of Federal Reserve rate cuts than by Iran’s weekend attack on Israel, which led to declines in stock markets, bitcoin, and oil.

Iran had warned of a strike against Israel and launched drones and missiles over the weekend in retaliation for what it claimed was an Israeli attack on its Damascus consulate. The damage was minor, and Iran declared the matter resolved.

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Market response and investor sentiment

Two senior Israeli ministers indicated on Sunday that retaliation was not imminent and that Israel would not act alone, leaving the region tense over the possibility of a broader conflict, while financial markets adopted a wait-and-see approach.

“It is too early to assess,” said Jason Wong, senior market strategist at BNZ in Wellington. “The weekend attack was largely symbolic… it’s now up to Israel’s response.”

Investors have reduced bets on Fed rate cuts and postponed the start of the easing cycle to September following Wednesday’s higher-than-expected consumer price index (CPI) report.

“It’s a light week for data, so all eyes will be on Fedspeak, where more than a dozen voting members of the FOMC are expected to stress patience after last week’s strong CPI reading,” said Nicholas Chia, Asia macro strategist at Standard Chartered Bank.

“Continued tensions in the Middle East, with the risk of a prolonged cycle of action and reaction, should lead to demand for safe-haven assets,” he added.

The two-year Treasury yield surpassed 5% on Thursday, reaching 4.9%.

The euro experienced its largest weekly percentage decline since late September 2022 last week, while the pound saw its largest weekly percentage decline since mid-July.

Meanwhile, the depreciation of currencies in trading partner countries pushed China’s trade-weighted currency index to a high of 100.32 in March 2023, suggesting a loss of competitiveness.

Bitcoin fell below $62,000 on Sunday, dropping $10,000 or 15% from the previous week’s highs. It was last trading at $65,343.