The dollar held steady on Thursday as renewed military tensions between the United States and Iran kept markets on edge, amid concerns about continued inflationary pressures and rising interest rates, while the Chinese yuan held steady after June inflation data came in weaker than expected.
Most Asian currencies also maintained their trading ranges following the release of the minutes from the Federal Reserve's June meeting, which revealed a clear division among monetary policymakers regarding the path of interest rates.
Meanwhile, the Japanese yen remained near its lowest levels in about 40 years, keeping markets on alert for any potential intervention from the Japanese government.
The Chinese yuan weakens following mixed June inflation data.
The US dollar/Chinese yuan (USD/CNY) pair fell by less than 0.1% on Thursday, following the release of June inflation data, which mostly came in below expectations.
The consumer price index rose 1% year-on-year in June, compared with expectations of 1.1%, and down from 1.2% in the previous month.
This reading indicates continued weakness in consumer spending and domestic demand.
In contrast, the producer price index jumped to a four-year high of 4.1%, boosted by higher input costs due to rising energy and commodity prices following unrest in the Middle East.
The rise in the producer price index is expected to eventually contribute to pushing up consumer price inflation, as increased input costs are passed on to the end consumer.
ING analysts said in a research note: “Data is moving from near-deflationary levels toward low positive inflation. This level of inflation is unlikely to deter the People’s Bank of China from taking monetary policy action if it deems it necessary,” adding that an interest rate cut in China remains a possibility.
They added that low interest rates may put pressure on the yuan, but they do not expect a sharp decline in the currency in the coming months.
The dollar stabilizes as markets digest Iran tensions and the Federal Reserve minutes.
The dollar index settled at 100.76 points on Thursday, following a volatile session in the markets the previous night.
Although renewed tensions between the United States and Iran initially boosted the dollar, it quickly lost its gains after the minutes of the Federal Reserve meeting revealed a split among monetary policymakers over whether to proceed with further interest rate hikes.
However, the dollar remained near its highest level in 13 months, at a time when Federal Reserve officials pointed to inflation as the main concern, warning that continued inflationary pressures could call for further tightening of monetary policy.
Fears of rising inflation have increased as oil prices have surged this week amid renewed military escalation between the United States and Iran, after Washington launched several strikes inside Iran and US President Donald Trump declared the end of the ceasefire with Tehran.
Amid these escalating tensions in the Middle East, most Asian currencies fluctuated within limited ranges.
The US dollar/Japanese yen (USD/JPY) pair fell by 0.1%, remaining close to its highest levels in nearly 40 years, as markets awaited any potential intervention from Japanese authorities, amid repeated warnings from officials in Tokyo.
In contrast, the Australian dollar/US dollar (AUD/USD) pair rose slightly, while the US dollar/South Korean won (USD/KRW) pair stabilized amid increasing volatility in local stock markets.
Both the US dollar/Singapore dollar (USD/SGD) and US dollar/Indian rupee (USD/INR) pairs were stable.
