Dollar holds near 2-month high as markets weigh rate hikes, Iran diplomacy

The dollar steadied near its strongest level in two months on Wednesday on prospects of interest rate hikes in the near term, while easing oil prices on hopes for a diplomatic breakthrough to end the Middle East war kept investors on edge.

The euro was at $1.1446 in early trading, loitering near its weakest level since late July. Sterling bought $1.3337. The dollar index, which measures the US currency against six rivals, was at 100.56.

The recent barrage of rate hikes and hawkish rhetoric from major central banks has taken centre stage in currency markets as the US-Israeli conflict with Iran drives oil prices higher and fans inflation worries.


Investors are now anticipating further tightening from central banks, with Federal Reserve officials flagging the possibility of more hikes if inflation does not ease.

"The dollar's support from rates looks durable, but futures already price more tightening than the Fed's own projections, so the dollar now needs the data to confirm it," said Kieran Williams, head of Asia FX at Intouch Capital Markets.

Oil markets remain in the spotlight with Brent crude futures at $99.22 per barrel on hopes that diplomacy at the UN General Assembly could pave the way for a resolution to the Middle East war. Brent has risen 37% since the conflict erupted at the end of February.

US President Donald Trump warned that he could annihilate Iran if there is no deal to end the war, but also suggested an agreement could come soon amid the diplomatic efforts at the UN.

"The good news is that oil prices have moderated somewhat from the highs but the path forward remains unclear given the lack of clarity around a possible resolution of the conflict," said Michael Wan, a currency analyst at MUFG.

Investors are also waiting for a high-stakes meeting between Trump and Chinese President Xi Jinping as the two leaders seek stability in a relationship under pressure over wide-ranging issues.

The Japanese yen was at 157.55 per US dollar as traders remain wary of the threat of intervention as markets judged the Bank of Japan's rate hike to a 31-year high last week as insufficiently hawkish.

Two dissenting votes and the absence of a clear hawkish signal were enough to fuel doubts over how quickly the BOJ will tighten policy, particularly after the Fed raised rates last week and flagged further hikes ahead.

Japanese markets are closed for a holiday and the low liquidity period is seen by analysts as an optimal time for authorities to intervene if needed.

"The BOJ hike didn't narrow the (yield) gap because the Fed hiked by the same amount two days earlier, so the lean is still higher," said Intouch's Williams.

"160 (per US dollar) remains the risk, but officials have reportedly moved away from telegraphing intervention and from any fixed level, so the cap could come earlier and in other forms."