Dollar Maintains Stability Amidst Rising U.S. Interest Rates and Geopolitical Tensions

On Monday, the dollar remained steady, bolstered by its most significant weekly surge since 2022, buoyed by the outlook of persistently high U.S. interest rates and escalating conflicts in the Middle East.

Last week, the dollar advanced by 1.6% against a basket of six major currencies following a modest yet unsettling uptick in U.S. inflation, casting doubt on expectations for U.S. rate cuts. Meanwhile, European policymakers hinted at a potential rate cut within the coming months.

Although geopolitical tensions escalated over the weekend with Iran’s attack on Israel, the initial currency movements on Monday appeared to be driven more by diminishing expectations of Federal Reserve rate cuts rather than the weekend events. Market response to Iran’s symbolic attack remained relatively subdued.

Jason Wong, senior market strategist at BNZ in Wellington, remarked, “It is too early to judge… it’s now over to what Israel’s response will be.”

Iran’s retaliatory strike, involving over 300 drones and missiles, targeted Israel following an alleged attack on its Damascus consulate by Israel. Despite causing only modest damage, Iran declared the matter concluded.

The dollar index, gauging the currency against its peers, held steady at 105.92, marginally below Friday’s 5-1/2 month high of 106.11.

Chris Turner, global head of markets at ING, highlighted the dollar’s appeal as a safe-haven currency amidst ample liquidity, high U.S. deposit rates, and U.S. energy independence.

The yen experienced significant depreciation on Monday, hitting a 34-year low against the dollar at 153.93.

Amidst the yen’s decline, speculation regarding currency intervention resurfaced. Japanese Finance Minister Shunichi Suzuki stated readiness to monitor currency movements closely and intervene if necessary.

Nicholas Chia, Asia macro strategist at Standard Chartered Bank, noted that investors are reducing bets on Fed cuts following last week’s CPI report, anticipating a delay in the easing cycle until September.

The euro, recording its largest weekly drop since late September 2022 last week, showed marginal gains on Monday, hovering around $1.0660 but remaining near a five-month low.

Bitcoin witnessed a decline below $62,000 on Sunday, marking a 15% decrease from its recent highs. However, it showed signs of recovery on Monday, rising to $66,381.

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