Dollar Holds Near Weekly High, Geopolitical and CPI Tensions Boost Yields
The US dollar held near its highest level in a week on Wednesday (May 13), supported by renewed uncertainty in the Middle East and the market's response to higher-than-expected US inflation. The dollar index (DXY) rose 0.2% to 98.501, its highest since May 5, while the euro fell 0.26% to $1.17095 and sterling weakened 0.1% to $1.3524.
The risk-off tone was selective: the Australian dollar remained relatively stable at $0.72410, while the New Zealand dollar fell 0.3% to $0.59345. In commodities, oil fell about 1% but remained strong above $100/barrel, with Brent last trading around $106.6, maintaining market sensitivity to supply risks and the Strait of Hormuz.
Geopolitical factors returned to the forefront after US President Donald Trump called the ceasefire with Iran "on life support" and Tehran rejected US proposals to end the war. This uncertainty strengthened the dollar's appeal as a liquid asset, while also leading markets to believe that the longer the disruption persists, the more difficult it will be for the central bank to balance inflation and growth.
From a macro perspective, US CPI rose 3.8% year-on-year in April, the highest since May 2023, reinforcing the Fed's repricing of its interest rate path. Two-year and 10-year Treasury yields held near seven-week highs at around 3.9812% and 4.461%, respectively, while the market increasingly discounted the possibility of a rate cut this year and priced in a 25-bps hike at the December meeting at around 35% (CME FedWatch).
FX attention was also focused on the yen. USD/JPY fell slightly to 157.77 after a sudden rally the previous day sparked speculation of a "rate check," often associated with potential intervention. US Treasury Secretary Scott Bessent's comments that the US and Japan agreed that excessive volatility was undesirable provided psychological support, although market participants believe intervention alone may not be enough. The Bank of Japan also stated that Bessent did not meet with Governor Kazuo Ueda during his visit to Tokyo.
Future market-monitored variables include any updates on the situation in the Middle East and the Strait of Hormuz, US yield movements following inflation data, as well as Fed policy dynamics ahead of Jerome Powell's term ending on Friday and developments following Kevin Warsh's confirmation as Fed governor. In Asia, the offshore yuan traded around 6.79 per dollar ahead of Trump's visit to Beijing, potentially increasing the USD's sensitivity to geopolitical and diplomatic headlines.
Source: Newsmaker.id
