Currency markets remained stable on Thursday as investors assessed a recent increase in oil prices and global bond yields, while the dollar struggled to gain traction ahead of inflation readings that may influence the U.S. Federal Reserve’s policy direction. Brent crude futures maintained a strong position above $100 a barrel following their breach of this threshold on Wednesday. This development coincided with a significant escalation in hostilities between Iran and the U.S., marked by the most extensive series of attacks on shipping from both parties since the onset of the conflict, thereby exacerbating concerns regarding the disruption of energy supplies from the Middle East. Fresh energy-induced inflation pressure has propelled global bond yields upward, with benchmark 10-year Treasury yields reaching their highest levels since 2023, coinciding with a disappointing buyback program of longer-dated bonds.
The greenback, however, experienced only marginal relief, depreciating against major peers following an earlier upward movement. The euro and sterling both experienced slight increases, last recorded at $1.1639 and $1.3555, respectively. The yen maintained its strength, hovering close to a seven-month high, appreciating approximately 0.1% to 153.35 in anticipation of a forthcoming rate hike by the Bank of Japan next week. The dollar index, which measures the greenback against a basket of currencies, relinquished earlier gains and eased to 98.73. “There’s a dynamic there where ultimately, safe-haven hedge policy is a dollar. It would be expected to have traded firmer, but it hasn’t happened,” said Richard Franulovich. He added that markets were becoming less reactive to oil shocks as the war continued, while debasement trades, global central bank tightening, and a more interventionist Treasury Department were all factors negatively impacting the dollar “washing through in the background.”
The European Central Bank appears poised to increase interest rates on Thursday for the second occasion this year, and is anticipated to indicate its readiness to implement further tightening should the inflation outlook fail to show improvement. Meanwhile, the Bank of Japan is anticipated to increase interest rates to 1.25% on September 18 and subsequently to 1.75% in the second quarter of 2027, occurring earlier than previously anticipated due to ongoing concerns regarding widespread price pressures and the depreciation of the yen. Attention will shift to U.S. inflation metrics, notably producer prices, which will be released later on Thursday, and the Consumer Price Index, scheduled for Friday. These represent the final critical data points before the FOMC meeting on September 15 to 16. Traders are currently assigning a probability of approximately 60% to the likelihood of a Federal Reserve rate hike this month, following the release of Friday’s stronger-than-anticipated nonfarm payrolls report.
“While higher inflation may warrant tighter policy, additional rate hikes would also increase government borrowing costs at a time when fiscal deficits and debt servicing burdens are already under scrutiny,” said Lloyd Chan. Elsewhere, the New Zealand dollar exhibited a 0.3% appreciation, reaching $0.5851, while the Australian dollar remained unchanged at $0.7215. China’s offshore yuan remained stable at 6.705 per dollar, maintaining proximity to its strongest level in almost four years, following the release of data indicating an increase in both producer and consumer price inflation, driven by rising energy costs.
