By Rae Wee and Dhara Ranasinghe
LONDON, March 16 (Reuters) – The dollar pulled back from 10-month peaks on Monday in a tentative start to a week that brings a slew of central bank meetings held under the shadow of the U.S.-Israel war on Iran.
The U.S. Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan are among those to hold their first policy meetings since the Middle East conflict began, offering investors a sense of how rate setters view the impact of soaring oil prices on inflation and growth.
As the European session got underway, the dollar index was a touch lower at 100.27 and holding below a 10-month high hit on Friday.
The dollar has benefited from a flight to safety since the U.S.-Israeli strikes on Iran began at the end of February. Other major currencies such as the euro have been hurt by their economies’ dependence on oil imports.
Since the start of the conflict, investors have almost eliminated their bearish bets against the dollar, according to weekly data from the U.S. markets regulator.
Still, the euro bounced from a 7-1/2-month low hit earlier in the session to trade 0.25% higher at $1.1442, while sterling was up 0.23% at $1.3252 – not far from the 3-1/2-month low it hit on Friday.
“The fact that we have central bank meetings this week means markets have an incentive to step back for now,” said ING currency strategist Francesco Pesole, noting that U.S. President Donald Trump’s efforts to secure an alliance for the safe passage of ships through the Strait of Hormuz was likely contributing to the dollar pullback.
Trump called on allies over the weekend to help secure the strait and said his administration is talking to seven countries about it. The Wall Street Journal reported that Washington plans to announce as early as this week that multiple countries have agreed to escort ships through the waterway.
Still, oil prices continued to climb, with geopolitical tensions still running high and uncertainty over when the war, now in its third week, could end. [O/R]
RBA TO HIKE, BOJ IN DIFFICULT SPOT
The Australian dollar was up 0.55% at $0.7018, buoyed by hawkish rate expectations at home with the Reserve Bank of Australia expected to tighten policy on Tuesday.
Markets now price in a roughly 72% chance that the RBA could deliver a 25-basis-point hike.
“We are now pencilling two more hikes, one this week and another in May,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
“In Australia, inflation was already too high even before the Middle East conflict started, so with the new energy price shock, that will further increase risks to inflation.”
The yen won a reprieve, and was last up 0.25% at around 159.35 per dollar.
It has come under pressure due to the nation’s heavy reliance on the Middle East for energy supplies, with the war also throwing into question the BOJ’s rate outlook.
“For Japan, the key risk is not simply higher oil prices, but a deterioration in terms of trade driven by the costs of imported energy and logistics, compounded by yen weakness and constrained monetary policy flexibility,” said Amova Asset Management’s chief global strategist, Naomi Fink.
“Markets – especially foreign exchange – may be underestimating the probability of these pressures forcing a more difficult policy trade-off for the Bank of Japan.”
Elsewhere, the New Zealand dollar was up almost 0.7% at $0.5814, while the onshore yuan was steady as investors assessed fresh economic data and ongoing Sino-U.S. trade talks.
China’s economy began the year on a firmer footing as factory output quickened while retail sales and investment rebounded in January-February, data showed.
(Reporting Rae Wee in Singapore and by Dhara Ranasinghe in London; Editing by Kirsten Donovan)
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