Key Takeaways:
The dollar traded flat near a three-month low as investors braced for U.S. inflation data and Fed testimony while a new Strait of Hormuz blockade threatened to spike oil prices.
The dollar held steady at 101.222 on the DXY index Tuesday as traders weighed U.S. inflation data due at 1230 GMT against President Donald Trump's announcement reinstating a naval blockade of Iranian vessels in the Strait of Hormuz.
"We are sticking with our view that we do not see any hike from the Fed this year," said Mohit Kumar, economist at Jefferies, noting that the recent rise in oil prices was too recent to feed meaningfully into inflation data.
The U.S. dollar was little changed at 162.32 yen and traded at 1.2941 Singapore dollars, while the Australian dollar held at US$0.6918, LSEG data showed. The Strait of Hormuz — through which about 21% of global oil trade passes — now faces a U.S. blockade of Iranian vessels plus a 20% fee on all other cargo transiting the waterway, according to Trump's announcement.
The convergence of inflation data, Fed Chairman Kevin Warsh's testimony at 1400 GMT, and a potential oil supply shock creates a three-way risk event for currency markets. If crude spikes above recent highs, Asian FX could weaken further while the dollar gains on safe-haven flows — a scenario that would complicate the Fed's rate path.
The consumer price index release will be the first major test for markets this week, with economists expecting a modest increase after gasoline prices retreated in June. Warsh, testifying before Congress later Tuesday, will probably stress that the Fed will respond to incoming data and inflation risks, Kumar said.
Oil Shock Threatens Asian Currencies
Asian currencies consolidated in early trade but faced headwinds from risk-off sentiment tied to the Middle East escalation. "Renewed concerns about energy supply disruption in the Strait of Hormuz" weighed on sentiment, said Carol Kong, economist and currency strategist at Commonwealth Bank of Australia. She flagged AUD/USD support at 0.6847, about 1% below current levels.
Oil-sensitive currencies across Asia could come under further pressure due to the sharp rise in energy prices, said Chang Wei Liang, foreign-exchange and credit strategist at DBS Group Research. "We maintain our view that oil prices will be volatile and structurally elevated," he said.
The last major Strait of Hormuz disruption — the 2019 attacks on Saudi Aramco's Abqaiq and Khurais facilities — briefly pushed Brent crude above $72 a barrel and triggered a 0.5% decline in the MSCI Asia Pacific Index over the following week. The current blockade is broader in scope, targeting Iranian vessels and imposing transit fees on all cargo.
Dollar-Yen Tests Resistance
The dollar-yen pair has been testing its weekly R1 pivot point while staying above daily, weekly and monthly volume-weighted average prices, said Matt Simpson, senior market analyst at StoneX. However, July's volume point of control at 162.69 yen — aligning with last week's high — could offer resistance. "It could then come down to the U.S. inflation report to determine whether we see a meaningful breakout or a deeper pullback," Simpson said.
The Fed's current rate stands at 5.25% to 5.50%, unchanged since July 2023. Overnight index swaps price no change at the next meeting, with the first full quarter-point cut not fully priced until mid-2027, according to LSEG data.
This article is for informational purposes only and does not constitute investment advice.
