The Zhitong Finance App learned that the US dollar rose to its highest level in nearly two months on Wednesday. At a time when inflationary pressure in the US continues and Federal Reserve officials release hawkish signals one after another, the market is betting that interest rates may be raised further in the short term to push capital to continue flowing to the US dollar. However, international oil prices have recently declined from high levels, and the subsequent trend may affect global inflation prospects and become an important variable in the monetary policies of central banks.
The dollar index, which measures the dollar's performance against six major currencies, rose 0.36% to 100.92 on Wednesday. Major non-US currencies are generally under pressure. EUR/USD fell to its lowest level since the end of July, and recently fell 0.37% to 1.1405 US dollars; GBP/USD once fell 0.5% to 1.3273 US dollars, the lowest level since the beginning of July.
Recently, major central banks have intensively raised interest rates and released hawkish rhetoric, which has become the core logic of foreign exchange market transactions. The seven-month conflict between the US, Israel, and Iran has boosted energy prices and heightened concerns about inflation, prompting investors to re-evaluate the path of global interest rates. The Federal Reserve raised the benchmark interest rate by 25 basis points to 3.75%-4.00% last week, the first rate hike in more than three years. A number of Federal Reserve officials further stated this week that if inflation does not cool down quickly enough, monetary policy may continue to be tightened in the future.
ING strategist Francesco Pesole said: “This shows once again that the Federal Reserve is still the dominant logic in the market, and that the hawkish remarks of the Federal Reserve officials are sufficient to maintain demand for the dollar.”
The energy market remains an important factor affecting the dollar and global monetary policy prospects. Brent crude oil futures rose about 1% on Wednesday to break through $100 per barrel again, ending the previous five consecutive trading days of decline. Previously, the market had anticipated that diplomatic activity during the UN General Assembly might push the seven-month war in the Middle East towards a resolution, thus causing oil prices to fall from a high level.
Since the outbreak of the conflict at the end of February, Brent crude oil futures have accumulated an increase of about 37%. At the same time, the pressure on physical energy prices has become more prominent, with related prices rising by at least 75% in Europe and 40% in the US.
Pesole said that it is currently uncertain whether the previous drop in oil prices will evolve into a continuous decline. From an interest rate perspective, if crude oil continues to stay in the range of 90 to 100 US dollars per barrel, it may still not be enough to cause the market to clearly shift to more dovish monetary policy expectations. In other words, unless there is a more continuous and significant decline in energy prices, the inflationary pressure faced by the Federal Reserve and other major central banks will still be difficult to significantly ease.
Although the price of crude oil has declined somewhat from recent highs, the price of refined oil products is still high. As one of the most important fuels in the transportation sector, diesel prices have risen to historic highs. US diesel prices have set records, and European diesel prices have also risen to multi-year highs, which means that transportation and logistics costs may still be further transmitted to commodity prices.
US President Trump said on Tuesday that he supports considering banning diesel exports to reduce domestic diesel prices in the US. However, analysts warned that this measure could disrupt global energy supply flows and have counterproductive effects.
In his speech at the UN, Trump also warned that if an agreement to end the war cannot be reached, the US may take further military action against Iran; at the same time, he also hinted that an agreement may soon emerge as New York's diplomatic activities continue to advance.
Michael Wan, a foreign exchange analyst at Mitsubishi UFG Financial Group (MUFG), said that the good news is that oil prices have fallen somewhat from their previous high, but since it is still unclear whether and when the conflict can be resolved, there is still great uncertainty about future trends.
As far as the foreign exchange market is concerned, oil prices and the US dollar have now formed an important policy transmission chain. Continued high energy prices may drive up corporate costs and consumer prices, thereby keeping inflation at a high level; the more stubborn the inflation, the more likely it is that the Federal Reserve will maintain high interest rates or even continue to raise interest rates, while higher US interest rates support the dollar.
A number of recent economic data also show that US demand is still strong. Meanwhile, Federal Reserve officials are increasingly concerned about inflationary pressures other than energy and supply shocks, so the market remains wary of further interest rate hikes in the short term.
However, if the situation in the Middle East eases and oil prices continue to fall, global inflationary pressure may decline, and the market's policy expectations for the Federal Reserve and other major central banks may also be readjusted at that time.
While the US dollar strengthened, the yen continued to be under pressure. At one point, the dollar rose to around 158 against the yen. The Bank of Japan raised policy interest rates to the highest level in 31 years last week, but the current rate hike has not fully convinced investors that the Bank of Japan will continue to raise interest rates rapidly in the future, and the yen continues to weaken as a result. Meanwhile, as the yen gets closer to 160, the level that the market is paying close attention to, investors are once again wary that the Japanese authorities may interfere in the foreign exchange market.
The Japanese market was closed on Wednesday due to the holiday, and market liquidity was relatively low. Some analysts believe that if the Japanese authorities decide to act, the low liquidity environment may amplify the effects of the intervention.
Kieran Williams, head of Asian foreign exchange at Intouch Capital Markets, said that USD/JPY 160 is still a risk level worth paying attention to, but Japanese officials seem to have recently reduced early intervention signals and are no longer clearly acting around a certain fixed exchange rate level, so actual intervention may have occurred earlier or may take other forms.