International markets are betting that US President Donald Trump will try to end the war as soon as possible, but Trump has also repeatedly threatened to hit Iran hard to cut off energy supplies through the Strait of Hormuz.
The dollar, which has been buoyed by a week-long war that has pushed oil prices higher, has given up some gains on hopes of a quick resolution, but analysts remain skeptical that the war will end soon.
“We expect the fight to go on for months, not weeks, while acknowledging the high level of uncertainty,” said Christina Clifton, head of currency strategist at the Commonwealth Bank of Australia.
The US and Israel fired on Iran on Tuesday in what the Pentagon and the Iranians called the most intense airstrikes of the war.
Iran’s Islamic Revolutionary Guard Corps has said that if the US and Israeli attacks do not stop, they will stop exporting oil from the Gulf, raising the risks to the global economy.
Rapidly evolving developments in the Middle East have left traders wondering how to best price risk, and for now they appear to be on the sidelines. “Traders are largely sitting on their hands and waiting for more news and more clarity to price risk more effectively,” said Chris Weston, head of research at Pepperstone.
The euro last traded at $1.16205 in early Asian hours, slightly firmer than a three-month low hit on Monday. Sterling was up 0.12% at $1.34305.
The dollar index, which measures the US unit against six other rivals, was at 98.876, an inch away from Monday’s three-month high.
The risk-sensitive Australian dollar was near a four-year high on Tuesday and last traded at $0.713.
Most of Australia’s gains came after Reserve Bank of Australia Deputy Governor Andrew Houser warned on Tuesday that higher oil prices would push up inflation and added pressure for a rate hike at its policy meeting next week. (AUD/)
“The conflict in the Middle East has had some big impacts on central bank interest rate expectations,” said CBA’s Clifton. “Since the war started at the end of February the markets have either gone from lower prices to higher prices, or lower prices than before.”
Fed funds futures traders are now pricing in a 39.7 basis point cut by the end of the year, highlighting doubts about whether the US central bank will cut a second 25 basis point rate this year.
Investors’ focus will be on US inflation data for February later on Wednesday. It is expected to show that core consumer prices rose 0.2% during the month while headline prices rose 0.3%, according to economists polled by Reuters.
Meanwhile, the Wall Street Journal reported on Tuesday that the International Energy Agency has proposed the largest release of oil reserves in its history to reduce oil prices that have risen due to the conflict.
