Dollar steady as Iran tensions underpin safe-haven demand, yen near 40-year low

TOKYO, July 23 – The dollar held steady on Thursday as escalating U.S.-Iran tensions bolstered demand for the safe-haven currency. Meanwhile, the Japanese yen hovered near a 40-year low, showing no signs of recovery. The dollar index, tracking its performance against a basket of major currencies, remained flat. The greenback's strength is attributed to the worsening flare-up between Washington and Tehran, which has driven a rebound in oil prices and heightened inflation fears. Brent crude futures rose over 1.3 percent to $95.31 a barrel after the U.S. military announced new strikes on Iran and Iranian-aligned Houthis claimed attacks on Saudi oil tankers, increasing the risk of further disruptions to Red Sea oil flows. Rising oil prices have stoked inflation concerns, pushing two-year U.S. Treasury yields to a 17-month high. Joseph Capurso, head of international economics and foreign exchange at Commonwealth Bank of Australia, noted that lower oil inventories increase the likelihood of shortages, exacerbating the negative economic impact of high energy prices and favoring the U.S. dollar. The euro saw a slight increase, trading at $1.1412. The European Central Bank is expected to keep interest rates unchanged on Thursday but may signal a potential rate hike in September due to rising energy prices. Meanwhile, the Japanese yen edged higher against the dollar to 163.1 yen, reversing earlier losses after reports suggested Bank of Japan officials might consider raising rates faster than anticipated. Sources familiar with the BOJ's thinking indicated the central bank is monitoring upside inflation risks that could prompt quicker rate hikes. Despite verbal warnings from Japan's finance minister and yen-buying operations in April and May, the currency's weakness has persisted, with analysts attributing it to expectations that the current administration might pressure the BOJ to delay further rate increases.

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What is different from the start of the conflict five months ago is inventories. Lower inventories mean shortages of oil and gas are more likely the longer the conflict continues, exacerbating the negative economic impact of high energy prices which favours the USD.