NEW YORK: Middle East tensions push dollar higher along with U.S. bond yields
The Bloomberg Dollar Index rose in New York on Thursday, along with U.S. Treasury yields, as the U.S. stepped up its crackdown on Iran and ship traffic in the Strait of Hormuz fell sharply. The Bloomberg Dollar Spot Index rose 0.2%, rebounding from a four-week low hit on Wednesday; but it was still down 0.2% for the week as traders reconsidered the prospect of Federal Reserve interest rate hikes in the coming months. Data released earlier Thursday showed U.S. retail sales rose modestly in June, hurt by lower sales at gas stations. The yield on the two-year U.S. Treasury note rose about 3 basis points to 4.16%; the swap market is currently pricing in a rate hike by the Federal Reserve on July 29 of only 3 basis points. According to aggregated DTCC data, FX options trading volume is about 40% below recent averages. “We think there are three likely tailwinds for the dollar in the second half: tensions in the Middle East (Strait of Hormuz), the Fed (hawkish) and AI capex (hyperscale cloud providers),” Alex Cohen, a strategist at Bank of America, wrote on Thursday. GBP/USD fell 0.6% to 1.3462, having hit a two-month high on Wednesday. Reports that Shebana Mahmoud will become the next UK Chancellor of the Exchequer have spurred gains in the pound this week. GBP/USD one-month risk reversal is at around -55 pips, close to its least bearish levels since February. Previous data showed that the British economy unexpectedly grew in May. EUR/USD fell 0.3% to 1.1432; USD/CHF rose 0.5% to 0.8096. SNB officials believed in June that risks to inflation had increased, but they still saw no need to respond for the time being, according to meeting minutes released on Thursday. USD/JPY rose 0.2% to 162.50. The Canadian dollar fell 0.1% to C$1.4055 per U.S. dollar, as active wildfires in northern Ontario came into focus.