US FX WRAP: Dollar gains in Middle East driven trade
The Dollar largely gained vs. G10 FX peers, albeit not seeing extensive gains against any particular currency as escalating geopolitics dominated the tape. As such, and amid risk off trade, the Greenback benefitted from the seemingly worsening US/Iran relations. Over the weekend, Trump said the US will guide neutral ships safely out of the Strait of Hormuz, but on Monday there were numerous reports of fire, with UAE defense system activated on six different occasions. Highlighting the range of attacks, a South Korea cargo ship was struck in Hormuz, while UAE's Fujairah port caught fire. As such, attention will be on any rhetoric, from either side, to see what transpires next. Away from the Middle East, Fed's Williams (voter) noted monpol remains well positioned for uncertain economy, and the job market break even might range between zero and 50k jobs per month now. The influential Williams later added longer-term outlook still suggests eventual rate cuts will happen and does not see need to start weighing Fed interest rate hike. Ahead, US non-farm payrolls report is the highlight on Friday.
JPY was the relative outperformer, albeit only flat, which once again only told half the story as USD/JPY traded between 155.69 and 157.30, with intervention once again touted, after a sharp move in overnight trade. In addition, Japanese Finance Minister Katayama remarked they would take firmer steps against speculative FX activity, under the remit of the 2025 US agreement
G10 FX newsflow was sparse elsewhere, as focus resided around the Middle East picture, although there were a few central bank speakers. From Europe, ECB's Muller said ECB rate is at more-or-less neutral level and allows time to wait, while Kazimir noted policy tightening in June is all but inevitable, and Nagel remarked that a June rate hike may be warranted if the inflation outlook does not improve significantly. Out of the Antipodeans, whereby Aussie was the G10 laggard, RBNZ Board Member Gai said supply shocks such as the Hormuz situation have raised the neutral rate. Ahead, RBA is overnight whereby the central bank is expected is expected to deliver a third consecutive rate hike, as a recent Reuters poll showed 30 out of 33 economists expect the RBA to hike the Cash Rate by 25bps to 4.35%, while only three economists forecast rates to be kept unchanged at the current 4.10% level.
The dollar's strength against G10 currencies reflects a risk-off sentiment driven by escalating geopolitical tensions, particularly concerning US-Iran relations. This has prompted traders to reassess their positions, with potential dollar support in light of further Fed commentary suggesting a cautious outlook on rate hikes. Meanwhile, the JPY remains stable, but concerns over speculative FX activity signal potential market interventions, indicating heightened volatility ahead.