US FX WRAP: Dollar gains on US/Iran tensions to detriment of G10 peers

The Dollar Index saw gains on Tuesday as Middle East tensions once again escalated as the US confirmed it launched attacks inside Iran, with an Iranian military source saying they will respond to US attacks in multiple ways and will be multiple times their attacks. As such, following all the US/Iran updates, the dollar saw strength, as did oil, while Treasuries, spot gold, and US indices all sold off in typical risk-off trade. Overnight, desks will await any response and any retort from the US, given President Trump warned Iran will be ‘totally wiped out as a country’ if it retaliates, and “if they do respond, they’ll be hit much harder". Away from geopolitics, US data came in the form of ISM Mfg. PMI and JOLTS; the former slightly disappointed, although prices were underneath consensus, while JOLTS declined and was underneath Wall St. expected; the quits rate edged lower while the vacancy rate was unchanged M/M. Lastly, Fed Governor Barr remarked that if inflation doesn't moderate soon, it will be time for an interest rate hike.

G10 FX was lower against the Greenback and predominantly due to the aforementioned Dollar strength and the geopolitical turmoil, as opposed to any currency-specific newsflow. Despite saying that, the Yen weakened and was subject to headlines; overnight, US Treasury Secretary Bessent told Japanese officials that rate hikes are needed, according to NHK, and a Japanese MoF official expects the BoJ to act on the economy and not on US influence. Further reporting through the day said that BoJ Governor Ueda likely met Bessent on the sidelines of the G20 finance leaders' meeting on Sunday.

Elsewhere, currency-specific newsflow was sparse; no EUR move was seen on Final EZ Manufacturing PMIs, which were mostly revised lower, while headline inflation ticked higher to 3.3% as expected. On the central bank footing, ECB's Simkus said a hike in September is "not going to be enough", and a 50bps hike is not needed, while BoE's Mann stated it is better for interest rates to be a little bit too high and then of course, correct if necessary.

Overnight is the RBNZ meeting, whereby the central bank is expected to hike rates 25bps to 2.75%; the hike is very widely expected, and markets are fully pricing in the move, so the impact on the Kiwi will be highly dependent on whether the statement will still include firmly hawkish guidance, and on updated rate/economic projections.

Episodes of direct US military action against Iran have historically produced the same first-move template in FX: broad dollar strength, yen underperformance despite its traditional haven status, and the G10 complex moving as a bloc rather than on idiosyncratic drivers. The distinguishing question in such episodes has been whether the move is a one-session risk premium or the start of a sustained repricing, which has tended to hinge on the retaliation sequence: a contained or telegraphed Iranian response has usually seen the dollar premium fade within days, while strikes on energy infrastructure or shipping have embedded it via the oil channel, where the terms-of-trade split between crude importers (Japan, the eurozone) and exporters reshuffles the G10 ranking. The yen's weakness alongside the dollar here is consistent with past episodes where Japan's energy-import dependence and rate differentials have overridden its safe-haven bid, and reported US pressure on Tokyo to hike adds a policy dimension that has historically proven slow to transmit. The data and central-bank colour (a soft ISM and JOLTS set against hawkish Fed, ECB and BoE commentary) frames the usual tension: geopolitical premia have tended to dominate front-end repricing only while the headlines run. The follow-ons are the nature and timing of any Iranian response and the US counter, the oil bid's persistence, and whether the RBNZ's statement retains hawkish guidance, since a fully priced 25bp hike leaves the statement and projections as the only live variables.