The US dollar edged lower on Thursday after reaching its highest levels of the week, as the United States and Iran exchanged fresh military strikes. The move came despite the recent surge in oil prices, which reignited inflation concerns and reinforced expectations that the Federal Reserve could raise interest rates in the near term.

Inflation concerns and rate hike expectations keep markets on edge

Minutes from the Federal Reserve's June meeting, released on Wednesday, showed that policymakers left the door open to another interest rate hike this year, despite ongoing divisions over the timing of such a move.

Lee Hardman, currency strategist at MUFG, said in a note that if tensions in the region escalate further and oil prices continue to climb sharply, the dollar's recent upward momentum could strengthen, particularly after the Fed signaled its willingness to raise interest rates this year.

The dollar index fell 0.2% to 100.91, weighed down by a 0.2% rise in the euro to $1.1435.

Meanwhile, the Japanese yen edged higher but remained close to its weakest level in 40 years at 162.32 per dollar, a level that could prompt Japanese authorities to intervene in the foreign exchange market to support the currency.

The latest rise in oil prices, driven by the renewed exchange of attacks between the United States and Iran, continues to weigh on the yen, given Japan's heavy reliance on imported fuel and the pressure on its fiscal position.

Volatility across currency markets also increased noticeably during the week.

Kyle Rodda, senior financial market analyst at Capital.com, said the renewed tensions in the Middle East have once again unsettled global markets and restored the war-related risk premium across asset prices.

He added that the most significant indirect effect of higher oil prices is their impact on inflation and global interest rates, noting that a sustained rally in crude could accelerate the timing of the next US interest rate hike.

Markets raise odds of a rate hike to 87%

The US military announced on Wednesday that it had launched another round of strikes against Iran, hours after US President Donald Trump declared the temporary agreement to end the war "over," sending oil prices sharply higher.

Investors view the escalating rhetoric between the two sides as a warning sign that inflationary pressures could intensify, pushing the yield on the benchmark 10-year US Treasury note to its highest level in seven weeks and signaling growing expectations for another rate hike this year.

The minutes of the Federal Open Market Committee's June meeting, the first chaired by Kevin Warsh, also showed increasing concern among policymakers over inflation.

According to CME Group's FedWatch tool, markets have raised the probability of a Federal Reserve interest rate hike this year to around 87%.

In energy markets, Brent crude futures slipped to around $77 a barrel, down 1.5% during Thursday's session after surging more than 5% on Wednesday to their highest level in nearly two weeks.

Among other major currencies, the New Zealand dollar led gains, rising 0.7% to US$0.574 after the Reserve Bank of New Zealand raised interest rates the previous day and signaled that another increase remains possible if warranted.

The Australian dollar also rose 0.14% to US$0.694, while sterling gained 0.2% to US$1.342.

Gold prices rose in European trading on Thursday, heading for their first gain in four sessions, supported by a weaker US dollar and a decline in global oil prices after US Central Command announced the end of military strikes on Iran.

Markets are closely watching the release of more key economic data from the United States, as well as comments from Federal Reserve officials, for fresh clues on the path of US interest rates.

The Price

• Gold prices rose 1.0% to $4,117.80 an ounce, from the opening level of $4,077.01, after hitting a low of $4,054.36.

• At Wednesday's settlement, gold prices lost 0.7%, posting their third consecutive daily decline, pressured by higher oil prices and renewed inflation concerns.

US dollar

The dollar index fell 0.3% on Thursday, extending losses for a second consecutive session and reflecting weaker levels for the US currency against a basket of major and minor currencies.

The decline came amid slower safe-haven buying of the currency, especially after some reports suggested that the current US-Iran military violations would not lead to a renewed war in the Middle East.

Global oil prices

Oil prices fell more than 2.0% on Thursday, retreating from two-week highs amid correction and profit-taking, while reports also pointed to continued shipping activity through the Strait of Hormuz.

Latest developments in the Iran conflict

• US Central Command (CENTCOM) announced the end of the current round of airstrikes on military targets inside Iran.

• The US bombardment focused on coastal cities and facilities along the Strait of Hormuz, destroying two maritime traffic control towers and two piers at the strategic Port of Chabahar.

• The US military said it had destroyed more than 60 Islamic Revolutionary Guard Corps naval attack boats and targeted air defense systems and coastal radar installations.

• Iran's Revolutionary Guard responded by launching ballistic missiles and drones targeting 85 US military sites in Bahrain and Kuwait.

• Iranian Parliament Speaker Mohammad Bagher Ghalibaf said Tehran would not back down, and that the strait would only be opened under "Iranian arrangements and procedures," not US threats.

• US President Donald Trump said the American strikes came in response to Iranian attacks on commercial vessels in the Strait of Hormuz.

US interest rates

• According to CME Group's FedWatch tool, markets are currently pricing a 73% probability that the Federal Reserve will leave interest rates unchanged at its July meeting, and a 27% probability of a 25-basis-point rate hike.

• Markets are also pricing a 17% probability that the Federal Reserve will leave interest rates unchanged at its December meeting, and an 83% probability of a 25-basis-point rate hike.

• To reassess those probabilities, investors are closely monitoring the release of more US economic data, along with comments from Federal Reserve officials.

Gold outlook

Kelvin Wong, senior market analyst for Asia-Pacific at OANDA, said the catalyst supporting the bearish trend in gold is the repricing of the possibility of a second Federal Reserve rate hike, expected in the first quarter of next year.

Wong added that after yesterday's skirmishes, the temporary ceasefire agreement between the United States and Iran is now on the verge of collapse, which could lead to sharp market volatility.

SPDR fund

Gold holdings at SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, were little changed on Wednesday, leaving the total at 1,002.51 metric tons.

The euro rose in European trading on Thursday against a basket of major currencies, remaining in positive territory for a second consecutive session against the US dollar as demand for the greenback as a safe-haven asset eased, particularly after US Central Command announced the conclusion of its military operations against Iran.

Following the recent surge in oil prices triggered by renewed tensions in the Strait of Hormuz, expectations have increased that the European Central Bank could deliver one additional 25-basis-point interest rate hike before the end of the year.

The Price

• The euro rose more than 0.1% against the US dollar to $1.1430, from today's opening level of $1.1416, after touching an intraday low of $1.1414.

• The euro closed Wednesday's session up by less than 0.1% against the dollar, marking its fourth daily gain in the past five sessions, supported by expectations of higher European interest rates.

US dollar

The dollar index fell 0.1% on Thursday, extending losses for a second straight session and reflecting broad weakness in the US currency against a basket of major currencies.

The decline came as demand for the dollar as a safe-haven asset slowed after reports suggested that the latest US-Iran military exchanges were unlikely to trigger a renewed war in the Middle East.

Global oil prices

Oil prices fell by around 0.5% on Thursday, retreating from two-week highs amid profit-taking and corrective trading, while reports indicated that shipping traffic through the Strait of Hormuz continued uninterrupted.

Latest developments in the Iran conflict

• US Central Command (CENTCOM) announced the conclusion of the current round of airstrikes on military targets inside Iran.

• The US strikes focused on coastal cities and facilities along the Strait of Hormuz, destroying two maritime traffic control towers and two piers at the strategic Port of Chabahar.

• The US military said it had destroyed more than 60 Islamic Revolutionary Guard Corps naval attack boats, while also targeting air defense systems and coastal radar installations.

• Iran's Revolutionary Guard responded by launching ballistic missiles and drones targeting 85 US military sites in Bahrain and Kuwait.

• Iranian Parliament Speaker Mohammad Bagher Ghalibaf said Tehran would not back down, stressing that the Strait of Hormuz would only reopen under "Iranian arrangements and procedures," not under US threats.

• US President Donald Trump said the American strikes were carried out in response to Iranian attacks on commercial vessels transiting the Strait of Hormuz.

European interest rates

• Money markets are currently pricing around a 10% probability of a 25-basis-point European Central Bank rate hike at the July meeting.

• The probability of a 25-basis-point ECB rate hike in December has risen to above 90%.

• Investors are awaiting additional eurozone data on inflation, unemployment, and wage growth to reassess those expectations.

The Japanese yen rose in Asian trade on Thursday against a basket of major and minor currencies, heading for its first gain in five days against the US dollar as it attempted to recover from 40-year lows, while Japanese authorities remained on alert to support the currency against excessive moves.

The US dollar weakened after some reports suggested that the latest exchange of military strikes between the United States and Iran would not lead to a renewed war, and that negotiations would resume very soon to complete the roadmap under the 60-day ceasefire agreement.

The Price

• The Japanese yen exchange rate today: The dollar fell against the yen by around 0.15% to 162.36 yen, from today's opening level of 162.58 yen, after hitting a high of 162.61 yen.

• The yen ended Wednesday's trading down 0.3% against the dollar, posting its fourth consecutive daily loss and hitting a one-week low of 162.71 yen, near its weakest level in 40 years at 162.84 yen.

Japanese authorities

The yen has returned to focus once again, especially after approaching its lowest levels against the US dollar since 1986, raising the possibility of intervention by Japanese authorities to protect the local currency from excessive weakness.

US dollar

The dollar index fell 0.1% on Thursday, extending losses for the second consecutive session and reflecting weaker levels for the US currency against a basket of global currencies.

The decline came amid slower safe-haven buying of the US currency, especially after some reports suggested that the current US-Iran military violations would not lead to a renewed war in the Middle East.

Global oil prices

Oil prices fell by around 0.5% on Thursday, retreating from their highest levels in two weeks, as prices corrected lower and investors took profits, while reports also pointed to continued shipping activity through the Strait of Hormuz.

Japanese interest rates

• The probability of the Bank of Japan raising interest rates by 25 basis points at its July meeting is currently steady below 25%.

• To reprice those odds, investors are awaiting more data on inflation, unemployment, and wages in Japan.