(Bloomberg) — The dollar is poised to have its best day in two weeks as oil prices advanced amid fading optimism over easing tensions in the Middle East.
The Bloomberg Dollar Spot Index rose 0.2% Thursday, the most since July 23, following three days of declines. Brent rallied after a reported deal that would prohibit the passage of vessels belonging to the US, Israel and other hostile countries through the Strait of Hormuz. Higher energy costs have sparked inflation concerns that could prompt the Federal Reserve to deliver an interest-rate hike in September. Yields on US Treasuries also rose.
“What we are seeing is a bit of an unwind of rosy expectations,” said Paresh Upadhyaya, a strategist at Pioneer Investments. “It’s highly unlikely the US would accept many of the terms of the deal without significant changes.”
The dollar has advanced 1.5% since the US attack on Iran late February disrupted global energy flows. The oil rally has boosted the greenback and weighed on currencies from energy-importing nations like Japan.
All currencies in the Group of 10 fell against the dollar with the yen lagging behind many peers. The Japanese currency weakened beyond 158 per US dollar for the first time in nearly a week.
“With tensions elevated, investors are immediately beginning to price higher global inflation risk,” said Marcio Riauba, head of trading desk at Banco StoneX. He added that investors are rushing to safety.
Traders are bracing for more volatility amid risks of further interventions after the recent US-Japan joint efforts to prop up the yen. The cost of one-day option contracts tied to Bloomberg’s gauge of the dollar jumped to the highest since July 30 as traders await Friday’s jobs report.
Meanwhile, “solid US productivity growth is giving the dollar a fresh tailwind,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman.
On Thursday, the Bureau of Labor Statistics said US labor productivity accelerated at a faster-than-expected pace in the second quarter.
–With assistance from Beatriz Amat.
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