LONDON – The U.S. dollar remained in sight of 13-month highs on Tuesday ahead of U.S. inflation data, which will come under extra scrutiny as Middle East tensions boost oil prices, while Federal Reserve Chair Kevin Warsh delivers his first semiannual testimony to Congress.<\/p>\n
U.S. and Iranian forces traded attacks in the Gulf, where maritime traffic through the Strait of Hormuz has come to near-standstill, pushing oil LCOc1 towards US$90 a barrel. As a result, investors are now pricing in a higher chance of global interest rates rising this year.<\/p>\n
With uncertainty over how long the latest tit-for-tat exchanges might last and how they might affect the flow of oil to world markets, investors are focussed on the outlook for price pressures.<\/p>\n
\u201cCore inflation, combined with rising oil prices, is supportive for the dollar and then there\u2019s Warsh. I think he will be pressed a bit harder than he was post-Fed, which will be interesting, because he wants to keep his cards close to his chest,\u201d City Index market strategist Fiona Cincotta said of the new Fed Chair\u2019s aversion to giving much of a steer on monetary policy.<\/p>\n
Warsh said recently that anyone expecting the Fed to go soft on inflation would be \u201cdisappointed,\u201d although he stopped short of offering any guidance for what to expect in terms of monetary policy in coming months.<\/p>\n
Markets show traders are attaching a 20 per cent chance of a rate hike from the Fed in July, which has pushed U.S. Treasury yields above 4.6 per cent, their highest since May US10YT=RR, and given the dollar a layer of support.<\/p>\n
Meanwhile, Federal Reserve Governor Christopher Waller said rates may need to rise \u201cin the near term\u201d if data shows inflation remaining well above the central bank\u2019s 2 per cent target. Economists polled by Reuters expect U.S. headline inflation to have risen 3.8 per cent in June, while the core rate, which excludes food and energy inflation, is expected to have risen 2.8 per cent.<\/p>\n
The euro EUR= was up 0.2 per cent at $1.1399, while sterling GBP= rose 0.2 per cent to $1.337.<\/p>\n
Overnight currency volatility jumped, reflecting nervousness among traders. Overnight implied volatility for the euro EURONO=, which reflects demand to hedge against large, immediate swings in the currency, briefly topped 10 per cent on Tuesday, something that has rarely happened since April.<\/p>\n
Yen vulnerable<\/p>\n
The Japanese yen JPY= edged 0.1 per cent higher to 162.27 per dollar on Tuesday, but was barely above 40-year lows, which kept traders on alert for signs of possible official buying from Tokyo.<\/p>\n
The Japanese currency briefly strengthened following comments from Finance Minister Satsuki Katayama that Tokyo may consider adjusting state pension fund asset allocations if the environment surrounding asset management changed sharply.<\/p>\n
Health Minister Kenichiro Ueno told a separate press conference on Tuesday that the ministry would examine reviewing the Government Pension Investment Fund\u2019s (GPIF) asset allocation if needed, but downplayed the prospect of any near-term changes.<\/p>\n
\u201cIn order for yen-buying pressure from a review of GPIF\u2019s asset allocation to be sustained, the decision would likely need to be made quickly, and the increases in the allocation to domestic assets would probably need to be at least 5 percentage points\u201d in stocks and bonds each, said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.<\/p>\n
\u201cIf the increases are only modest, or if the decision-making process takes time, any additional yen buying is likely to be limited,\u201d he said in a note.<\/p>\n
By Amanda Cooper<\/p>\n
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