The Dollar wavers but climbs

The US Dollar posted its best daily performance in two weeks against a backdrop of heightened geopolitical risks and speculators closing out positions ahead of key US labour market data. Employment is expected to rise by 80K, with the unemployment rate to remain at 4.2%. The Fed prefers to prioritise the fight against inflation, so such figures are unlikely to alter the prospects of a rate hike in September. It would be a different matter if the actual figures deviated significantly from the forecast.

Brent has returned above $80 per barrel, as investors doubt the durability of the deal between Iran and Oman to reopen the Strait of Hormuz. Hardline figures in Tehran are demanding the removal of US and Israeli ships, as well as the lifting of sanctions and transit fees from unfriendly countries. It is doubtful that the US would agree to all this, which heightens the risks of a shift from de-escalation to escalation of the conflict, driving up oil prices and Treasury yields. At the same time, the S&P 500 is falling, creating the perfect backdrop for the US Dollar.

The strengthening of the greenback against major global currencies has meant that USD/JPY bulls have already recouped half of the losses incurred due to the coordinated currency intervention. Speculators are being aided by the wide spread between the Federal Reserve’s and the Bank of Japan’s interest rates, which is fuelling appetite for carry trades. Hedge funds are unfazed by the high-profile statements from officials in Washington and Tokyo regarding further intervention if necessary. However, as the US dollar approaches the ¥160 mark, the risks of such a scenario will increase.

For USD/JPY to consolidate at current levels, the Bank of Japan will need to take more decisive action. The forward market puts the odds of a monetary policy tightening by September at 60%; however, if Kazuo Ueda and his colleagues do not raise the overnight rate, this will trigger further yen sell-offs.

Rising geopolitical risks have caused only a temporary pullback in gold. When inflation is high and the Fed is reluctant to tighten monetary policy, the precious metal benefits from a favourable environment of falling real yields on US Treasury bonds. However, the US jobs report could change everything. 

Summary: Dollar gains as geopolitical risks lift oil and yields, while USD/JPY rebounds and gold awaits the US jobs report.