By Stefano Rebaudo
May 12 (Reuters) – The U.S. dollar extended gains for a second straight session on Tuesday, underpinned by sustained uncertainty over the Middle East conflict that drove investors into the greenback as a traditional safe haven.
The greenback rose sharply in March as the currencies of oil-reliant economies such as Japan and the euro area were heavily sold after oil prices surged following Iran’s effective closure of the Strait of Hormuz.
It weakened again after April 7, the start of a ceasefire, which Donald Trump threatened on Monday to end, dismissing Iran’s proposal as “a piece of garbage.”
The U.S. dollar index, a measure of its value against a basket of major foreign currencies, was up 0.36% at 98.30. It was at 97.85 on February 27 and hit 100.64 in late March. It fell below its pre-war levels late last week.
“It appears unlikely that a breakthrough would be achieved before the Trump-Xi summit later this week,” said Mohit Kumar, an economist at Jefferies.
Trump is expected to arrive in Beijing on Wednesday, where Iran is set to be among the topics discussed with Chinese President Xi Jinping.
CRUDE OIL PRICE SUPPORTING DOLLAR
“As long as crude oil prices stay high, because of the U.S.’ blockade [of Iranian ports] and Iran’s threat to tanker traffic in the Gulf, the dollar will stay strong,” said Thierry Wizman, global forex and rates strategist at Macquarie Group.
“The toll that high oil prices will take on the rest of the world’s economies will be much more pernicious than the toll [on] the U.S.,” he added.
Oil prices rose 3% on Tuesday as hopes for a deal to end the war on Iran faded. [O/R]
Wizman also argued that the U.S. administration has probably decided that its economic blockade of Iran — the ‘economic war’ — could be more effective than resuming bombing runs.
RATE OUTLOOK IN FOCUS
Investors are also closely watching the monetary outlook, with the Federal Reserve now expected to keep rates higher for longer, while traders are betting that the European Central Bank will hike its depo rate to about 2.75% by year-end from the current 2%.
The euro fell 0.33% to $1.1744.
Eyes will be on a U.S. inflation report due later in the session, which is forecast to show that consumer prices rose 0.6% last month after jumping 0.9% in March, according to a Reuters survey of economists. Estimates ranged from a 0.4% gain to a 0.9% rise.
“Given the likelihood of elevated inflation readings, the CPI on Tuesday and PPI on Wednesday, the case for eventual rate cuts this year looks increasingly difficult to sustain,” said John Velis, head of Americas strategy at BNY.
“The last two weeks’ worth of U.S. macro data showed an economy that is not yet feeling acute pressure from the shocks generated by the Iran conflict,” he added.
YEN STILL IN INTERVENTION WATCH ZONE
The Japanese yen jumped suddenly in the late Asian session on Tuesday, stoking speculation of a “rate check”, often a precursor to currency intervention.
The dollar was last at 157.57 against the yen, up 0.21% on the day, after U.S. Treasury Secretary Scott Bessent said he had great confidence that Bank of Japan Governor Kazuo Ueda will guide the central bank to a “very successful” monetary policy.
Japan’s authorities have supposedly spent nearly $63.7 billion in the current round of interventions.
(Reporting by Stefano Rebaudo; Editing by Sonali Paul, Kevin Liffey and Alexander Smith )