US dollar firms on war uncertainty; Aussie wobbles after RBA
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HONG KONG, March 17 : The safe-haven U.S. dollar rose on Tuesday as the rapidly worsening war in the Middle East weighed on investor sentiment, while the Australian dollar wobbled in choppy trading after the central bank chief sent the market hawkish signals following a close vote to raise interest rates.
The euro weakened 0.23 per cent to $1.1479, inching back towards the more than seven-month low touched on Monday. Sterling last fetched $1.3279, down 0.3 per cent on the day.
The dollar index, which measures the U.S. currency against six other units, was 0.19 per cent higher at 100.05, taking its gains to about 2.5 per cent since the U.S.-Israeli war with Iran broke out at the end of February.
There has been no let-up in attacks by both sides as the war entered its third week, with the critical Strait of Hormuz largely closed off. U.S. allies rebuffed President Donald Trump's request for help to reopen the waterway, stoking energy price gains and fears of inflation.
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Surging oil prices have triggered a sharp repricing of rates outlooks across the globe, which has lifted the U.S. dollar against most currencies as investors gravitated towards the safest assets.
"Positioning had been short, rate cut expectations have been pared back, and the Iran conflict has lifted risk premia in energy, so the dollar has been the clean hedge," said Kieran Williams, head of Asia FX at InTouch Capital Markets.
Given the uncertainty of the Middle East situation, it seems likely that near-term strength can continue while the war risk and oil premium stay elevated, he said.
RBA FLAGS INFLATION RISKS
As expected, the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.1 per cent as inflation re-accelerated, but the surprisingly tight vote initially caused the Aussie to slide to a low of $0.7050. It was last at $0.7057.
Five board members voted for the increase and four voted against, in the closest decision since the RBA started revealing the tallies last year.
There is a "material risk" that inflation will remain above target for longer than previously anticipated, with uncertainties in the Middle East possibly adding to global and domestic inflation, the RBA said in its statement.
"The five-to-four split vote decision itself probably did not out-hawk the market because the market was already quite hawkish," which triggered knee-jerk weakness in the currency, said Frances Cheung, head of FX and rates strategy at OCBC.
The RBA kicks off a series of eight central bank conclaves this week that investors will parse to gauge policymakers' views on the war's impact on inflation and growth.
Most, including the U.S. Federal Reserve, the Bank of England and the European Central Bank are expected to keep their policies unchanged, but the spotlight will be on comments from officials.
The Japanese yen weakened to 159.40 per dollar, just shy of the closely watched 160 level, despite verbal warnings from Japanese authorities on Tuesday.
Analysts expect the bar for currency intervention to be higher than in the past because of rising oil prices.
The yen is down more than 2 per cent against the dollar in March.
Bank of Japan Governor Kazuo Ueda said underlying inflation is accelerating toward the central bank's 2 per cent target ahead of its two-day policy meeting that ends on Thursday. Its board is widely expected to keep rates steady.
"While the sharp rise in the oil price is helping drive a bid for USDs, the yen is coming under pressure simply because high oil prices and Japan's heavy reliance on energy imports risks stoking inflation and a significant deterioration in its trade balance," said Prashant Newnaha, senior rates strategist at TD Securities.
"At some point authorities will need to determine whether to protect the yen or the bond market. They can't have both."
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