Dollar stands tall as new Gulf attacks fuel oil price surge, Fed hike bets

HONG KONG - The U.S. dollar held firm against most major currencies on Thursday as renewed attacks by the U.S. and Iran revived safe-haven bids while surging oil prices boosted rate hike bets, keeping the Japanese yen under pressure.

The dollar fetched 162.425 yen, hovering near the strongest level in a week. The euro and the British pound were largely flat and traded at $1.1426 and $1.3396, respectively.

The New Zealand dollar remained well bid after the previous day's rate hike and the central bank's hawkish stance, extending its gains by 0.5% to $0.5725. The Australian dollar added 0.1% at $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, senior financial market analyst at Capital.com.

The most significant second-order effect of the jump in oil prices is what it means for inflation and global interest rates, Rodda said. "A jump in oil prices could bring forward the timing of a Fed hike."

The U.S. military said it launched a round of fresh strikes on Iran hours after President Donald Trump declared that an interim agreement to end the war was "over", sending oil prices sharply higher. [O/R]

That gave investors a "wake-up call" on how energy prices can stoke inflation pressures, sending U.S. 10-year and 30-year Treasury yields to seven-week highs as the markets priced in a higher risk of rate hikes.

Adding to the pressure, the June FOMC minutes, the first under Chair Kevin Warsh, also showed a hawkish split as concern about high inflation mounted. The markets have increased the implied probability of a hike this year to about 87%, according to CME FedWatch.

Brent crude futures climbed 1.1% to $78.88, after settling up more than 5% on Wednesday in the highest level in over two weeks.

YEN'S STRUGGLE CONTINUES

Rising oil prices, fuelled by the renewed attacks of the U.S. and Iran, are pushing the yen back toward levels that risk eroding confidence in the currency.

The Japanese yen is struggling to regain ground after hitting 162.71 overnight, near its 40-year trough, erasing most of last week's unexplained, sudden jump 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, said Tony Sycamore, analyst at IG.

"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."

(Reporting by Jiaxing Li; Editing by Shri Navaratnam and Tom Hogue)

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