Dollar rides haven demand as Middle East talks ring hollow
Business
Dollar nears multi-month highs as Middle East war fears boost safe-haven demand. Rising oil prices lift rate hike expectations, weaken yen, euro, and risk currencies.
HONG KONG (Reuters) - The dollar pushed higher toward multi-month peaks on Friday as investors sought safety in the shadow of an intensifying Middle East war and mounting doubts over any path to de-escalation.
Markets were on edge following another rollercoaster week as U.S. President Donald Trump again extended a pause on strikes against Iran's energy facilities into April even as Washington and Tehran offered starkly conflicting accounts of diplomatic progress.
The Pentagon is also looking at sending up to 10,000 additional ground troops to the Middle East, the Wall Street Journal reported on Thursday, doing little to bolster investor hopes of an imminent end to the war.
That kept the dollar bid as investors flocked to the safe-haven currency and ramped up expectations of a U.S. rate hike by the year-end, owing to the inflationary pulse from higher-for-longer energy prices.
The yen , on the other hand, was left on the cusp of 160 per dollar and stood at 159.61, while the euro was off a touch 0.03% at $1.1525. Sterling eased 0.05% to $1.3325.
"It doesn't look like the conflict will end anytime soon," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "The dollar is king while this conflict lasts."
"If we're right about this conflict being protracted, I think oil prices will just keep rising and it will push the dollar higher, at the expense of net energy importers like the Japanese yen and the euro," she added.
The darkening market mood sent the risk-sensitive Australian dollar down to a two-month trough of $0.68722, while the New Zealand dollar similarly languished near its lowest level since January and traded down 0.15% at $0.5754.
Against a basket of currencies, the dollar was marginally higher at 99.93, though was on track for a 2.3% rise this month, which would mark its biggest gain since July last year.
Investors are now pricing in a 46% chance of a 25-basis-point rate hike from the Federal Reserve by December, according to CME Fedwatch tool, in a sharp reversal from more than 50 bps worth of easing expected before the war.
The Bank of England and the European Central Bank are also seen tightening policy, with the hawkish sea change in rate expectations hammering bonds and sending yields rising.
"A more prolonged disruption to energy supplies would deliver a larger hit to activity that would meet most definitions of a global recession and prompt a broader monetary tightening cycle," said analysts at Capital Economics in a note.
Yields on U.S. Treasuries were steady on Friday after a sharp rise overnight, with the two-year yield at 3.9776%. The benchmark 10-year yield eased slightly to 4.4097%.
