The U.S. dollar maintained its strength against the majority of major currencies on Thursday, as renewed hostilities between the U.S. and Iran spurred safe-haven demand, while rising oil prices intensified expectations for interest rate increases, thereby exerting pressure on the Japanese yen. The dollar fetched 162.425 yen, remaining close to its strongest level in a week. The euro and the British pound exhibited minimal movement, trading at $1.1426 and $1.3396, respectively. The New Zealand dollar maintained a strong position following the prior day’s interest rate increase and the central bank’s assertive posture, further advancing by 0.5% to $0.5725. The Australian dollar increased by 0.1%, reaching a value of $0.6937.

The U.S. dollar index, which measures the currency against a basket of six peers, was little changed at 100.96 “A flare-up of Middle East tensions has rattled global ​markets again and jammed a war risk premium back into asset prices,” said Kyle Rodda. The most significant second-order effect of the jump in oil prices is its implications for inflation and global interest rates, according to Rodda. “A jump in oil prices could bring forward the timing of a Fed hike.” The U.S. military announced the initiation of a new series of strikes on Iran shortly after President Donald Trump proclaimed that an interim agreement aimed at concluding the conflict was “over,” resulting in a significant increase in oil prices. That served as a “wake-up call” for investors regarding the potential of energy prices to exacerbate inflationary pressures, leading to movements in U.S. 10-year and 30-year yields.

Treasury yields have reached seven-week highs as the markets have adjusted to a heightened risk of rate hikes. Adding to the pressure, the June FOMC minutes, the first under Chair Kevin Warsh, also revealed a hawkish division as apprehension regarding elevated inflation intensified. The markets have raised the implied probability of a hike this year to approximately 87%, as indicated by CME FedWatch. Brent crude futures increased by 1.1% to $78.88, following a settlement that was up more than 5% on Wednesday, marking the highest level in over two weeks. Rising oil prices, driven by the renewed hostilities between the U.S. and Iran, are pushing the yen back toward levels that threaten to undermine confidence in the currency.

The Japanese yen is facing challenges in its attempt to recover after reaching 162.71 overnight, close to its 40-year low, effectively negating the majority of last week’s abrupt and unexplained surge against the dollar. That rebound was widely suspected to have been the result of stealth Japanese intervention, but is unlikely to be officially confirmed until the end of the month when the Ministry of Finance releases its intervention data, stated Tony Sycamore, an analyst. “Whether it becomes a more meaningful medium-term high will ultimately depend on incoming U.S. data and, to ​some degree, developments in the Japanese government bond market.”