The dollar remained stable close to its highest point in two months on Wednesday, driven by expectations of imminent interest rate increases. Concurrently, declining oil prices, fuelled by hopes for a diplomatic resolution to the ongoing conflict in the Middle East, contributed to a sense of unease among investors. The euro was at $1.1446 in early trading, hovering close to its lowest point since late July. Sterling acquired $1.3337. The dollar index, which measures the US currency against six rivals, stood at 100.56. The recent series of rate hikes and hawkish rhetoric from major central banks has become a focal point in currency markets, as the US-Israeli conflict with Iran propels oil prices upward and exacerbates inflation concerns.

Investors are currently bracing for additional tightening measures from central banks, as Federal Reserve officials have indicated the potential for further rate hikes should inflation persist without signs of moderation. “The dollar’s support from ​rates looks durable, but futures already price more tightening than the Fed’s own projections, so the dollar now needs the data ​to confirm it,” said Kieran Williams. Oil markets continue to attract attention, with Brent crude futures priced at $99.22 per barrel, buoyed by optimism that diplomatic efforts at the UN General Assembly may lead to a resolution of the conflict in the Middle East. Brent has experienced a 37% increase since the onset of the conflict at the end of February. US President Donald Trump cautioned that he could completely destroy Iran if a deal to conclude the conflict is not reached, while also indicating that an agreement might be forthcoming in light of the ongoing diplomatic initiatives at the UN.

“The ⁠good news is that oil prices have moderated somewhat from the highs but the path forward remains unclear given the lack of clarity around a possible resolution of the conflict,” said Michael Wan. Investors are anticipating a crucial meeting between Trump and Chinese President Xi Jinping, as both leaders aim to establish stability in a relationship strained by a multitude of pressing issues. The Japanese yen was at 157.55 per US dollar as traders remain cautious regarding the potential for intervention, given that markets assessed the Bank of Japan’s recent rate hike to a 31-year high as not sufficiently hawkish. Two dissenting votes and the absence of a clear hawkish signal were sufficient to raise concerns regarding the pace at which the BOJ will tighten policy, especially following the Fed’s recent rate increase and indications of additional hikes to come.

Japanese markets are currently closed for a holiday, and analysts perceive this low liquidity period as an advantageous opportunity for authorities to intervene if necessary. “The BOJ hike didn’t narrow ⁠the (yield) gap ​because the Fed hiked by the same amount two days earlier, so ​the lean is still higher,” said Intouch’s Williams. “160 (per US dollar) remains the risk, but officials have reportedly moved away from telegraphing intervention and from any ​fixed level, so the cap could come earlier and in other forms.”