Dollar Holds Firm on Middle East Risks

The dollar index held above 101 on Wednesday after advancing for a fourth straight session, supported by higher Treasury yields and rising oil prices as the US carried out strikes on Iranian targets for an 11th consecutive night. President Donald Trump also downplayed the likelihood of near-term talks with Tehran, while Iran-backed Houthi rebels in Yemen disrupted shipping through the Red Sea. Meanwhile, a series of attacks on the Caspian Pipeline Consortium terminal along Russia’s Black Sea coast added to supply concerns. On the economic front, ADP data showed US private employers added an average of 16,500 jobs per week over the four weeks ending July 4, down from an average weekly gain of 19,250 in the prior four-week period, marking a fourth straight slowdown in hiring. Markets expect the Federal Reserve to leave interest rates unchanged at next week’s meeting, while pricing in more than a 55% chance of a rate hike in September.

The dollar index strengthened to 101.1 on Tuesday, the strongest level in about a week, as investors continued to assess developments in the Middle East and the renewed surge in oil prices. Inflation concerns have resurfaced as tensions between the US and Iran continue to escalate, with the two countries exchanging strikes for a tenth consecutive day. On the monetary policy front, Fed Chair Warsh has repeatedly stressed that inflation remains a key concern for the central bank, a message that has been echoed by several other Fed officials in recent weeks. Policymakers have now entered their customary blackout period ahead of next week's FOMC meeting in which the central bank is widely expected to leave the federal funds rate unchanged. However, expectations for tighter policy remain elevated beyond July, with traders assigning roughly a 68% chance of a rate increase at the September meeting.

The dollar index traded near 101 on Tuesday after rising for three straight sessions, as ongoing hostilities between the US and Iran drove oil prices higher, reviving concerns about inflation and interest rate hikes. US attacks on Iran continued for a tenth straight day, with President Donald Trump warning that Tehran would be held responsible for the deaths of three US service members. Iran-backed Houthi militants also announced a maritime embargo against Saudi Arabia, raising concerns over energy shipments through the Red Sea. Meanwhile, Iran said mediators had presented proposals to ease tensions with the US after several days of hostilities, while reports pointed to a possible 10-day ceasefire. Markets now price in about a 55% chance of a Fed rate hike in September, up from 51% a day earlier. Meanwhile, Fed officials have entered the blackout period ahead of next week's FOMC meeting, where policymakers are widely expected to keep the federal funds rate unchanged.