Dollar muted as investors watch Israel-Iran conflict ahead of Fed decision

CNBC

5 hours ago

The U.S. dollar eased against the yen and Swiss franc on Wednesday, as fighting between Israel and Iran prompted investors to scoop up safe-haven assets, while a Federal Reserve decision on interest rates due later kept volatility subdued.
Israel has pounded Iran over the past six days to halt its nuclear activity and has asserted the need for a change of government in the Islamic Republic.
The U.S. military is also bolstering its presence in the region, Reuters reported, sparking speculation of U.S. intervention that investors fear could widen the conflict in an area replete with energy resources, supply chains and infrastructure.
The dollar has resumed its role as a safe haven, having gained around 1% against both the Japanese yen and Swiss franc since last Thursday. On Wednesday, the U.S. currency took a breather, edging fractionally lower against the yen and the franc and more noticeably so against the euro and the pound.
"The dollar is still a safe haven because of its depth and liquidity, so, yes the structural forces are diluting the dollar safe-haven activities, but they're not eroding them completely," said currency strategist Rodrigo Catril at National Australia Bank.
"But in a scenario of big risk aversion, the dollar will still gain support but maybe not to the same extent it has managed in the past."
Against a basket of six other major currencies, the dollar is still down around 8% so far this year, as confidence in the U.S. economy and the reliability of President Donald Trump'sadministration as a trading and diplomatic partner has faded.
With the Federal Reserve's decision on interest rates just hours away and markets closed on Thursday for the Juneteenth federal holiday, activity in currencies was muted.
Against the yen , the dollar fell 0.2% to 144.975 tilted into the red against the franc to 0.81665 francs.
Traders expect the central bank to leave borrowing costs unchanged and will closely parse what Chair Jerome Powell says about the outlook for growth and inflation.
Uncertainty was already running high and recent data have started to show the impact of Trump's erratic approach to trade and tariffs. The escalation in tensions in the Middle East, and the surge in crude oil prices to about $75 a barrel, have further complicated matters for policymakers.
Trump has repeatedly called for Powell to cut rates, accusing him of being too slow to lower borrowing costs. In the current environment, the Fed Chair is unlikely to signal when a cut might happen, according to strategists at MUFG.
"The takeaway this evening may be some modest increase in expectations of rate cuts from September onwards. The appetite to sell the dollar though will likely be muted for now until there is a clearer outlook on the Israel/Iran conflict over the coming days," MUFG head of research for EMEA Derek Halpenny said.
Weekly initial jobless claims data is due later, while on the macro front, the Swedish central bank cut rates as expected leaving the crown a touch weaker against the euro , which rose 0.3% to 10.998 crowns.
On Thursday, the Swiss National Bank, the Bank of England and the Norges Bank will deliver their respective rate decisions.
The pound rose 0.26% to $1.346 after data showed inflation cooled no more than expected to an annual rate of 3.4% in May, ahead of the BoE decision.
The euro was also up 0.3% at $1.1514.
In the background, an area of frustration for investors was a Group of Seven meeting in Canada that yielded little on the tariff front ahead of Trump's early-July deadline for additional levies.