Dollar Little Changed

The dollar index traded little changed around 101.1 on Wednesday, with the situation in the Middle East continuing to dominate the headlines. Oil prices extended gains to a six-week high as both the US and Iran signaled that a resumption of peace talks is unlikely in the near term despite ongoing mediation efforts. The rise in oil prices kept fears of renewed inflationary pressures elevated. Meanwhile, investors await next week's Federal Reserve policy meeting, with policymakers now in their customary pre-meeting blackout period. The Fed is widely expected to leave the federal funds rate unchanged. However, markets continue to price in the possibility of policy tightening later this year, with traders assigning roughly a 61% probability of a rate hike at the September meeting. The greenback was largely unchanged at 40-year highs against the yen and near one-week highs against the pound, while edging slightly lower against the euro.

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.