- The dollar had a stellar week after Kevin Warsh’s first policy meeting.
- The Bank of Japan hiked interest rates on Tuesday.
- Reports revealed that Iran had again closed the Strait of Hormuz.
Currency futures fell last week as the dollar rallied after a hawkish Fed meeting raised expectations of a sharp increase in the Fed rate. Meanwhile, the peace deal between the US and Iran helped ease inflation concerns as oil prices fell during the week. However, over the weekend, Iran announced the closure of the Strait of Hormuz, creating uncertainty.
Dollar index (Source: Bloomberg)
The dollar had a stellar week after Kevin Warsh’s first meeting as the Fed Chair. Recent developments in the Middle East have led to a more hawkish outlook for the Fed. Market participants were pricing an over 50% chance that the Fed would hike interest rates in December.
However, over the last week, the outlook for the Middle East war shifted, and there was optimism about an imminent end. The US and Iran finally reached an agreement to end their war. With this deal, Iran committed to reopening the Strait of Hormuz. Meanwhile, the US agreed to end the blockade of Iranian ports.
The deal would also give the two nations 60 days to negotiate other issues, such as Iran’s nuclear program. This news came out on Saturday last week, with the signing ceremony set for Friday. Therefore, oil declined, and there was more optimism about the future. With these developments, some had expected policymakers to relax their hawkish tone as inflation concerns had eased.
Nevertheless, the Fed was surprisingly even more hawkish than at the previous meeting. Policymakers were still open to rate hikes this year. After the meeting, traders fully priced in a rate hike in October. Consequently, Treasury yields and the dollar soared. Meanwhile, other major currencies, such as the yen, also suffered.
The recent decline in the Yen has forced Tokyo to intervene to strengthen the currency. However, it has not helped. The Bank of Japan also hiked interest rates on Tuesday as expected. Still, the yen is under significant pressure as the dollar rises. The euro also suffered amid dollar strength. The pound fell after downbeat inflation and employment figures last week.
Currency futures rebounded slightly in the new week as reports revealed that Iran had again closed the Strait of Hormuz. Meanwhile, Trump warned he might resume strikes on Iran, amid talks in Switzerland.
