Dollar holds gains, yen slips as Middle East energy shock deepens

The dollar held near its highest levels of the past week and the yen slipped for a second day at the start of Asian trading on Friday as renewed fears of energy supply disruptions in the Middle East pushed up bond yields and oil prices.

The US dollar index, which measures the greenback’s strength against a basket of six currencies, was trading at 99.081, holding steady after gaining 0.3% on Thursday to reach its highest level since Sept 7. The rise followed the release of data showing US producer prices increased 0.4% in August, meeting market expectations as energy prices rebounded during the month.

“The safe-haven US dollar gained on risk-aversion flows, helped by higher energy prices that have lifted the chance of a Fed hike next week to 70%,” said Tony Sycamore, market analyst at IG in Sydney.

Energy prices extended gains into a sixth day, with Brent crude futures rising 1.2% to US$108.96 a barrel as trading resumed in Asia.

Both major benchmarks breached the $100 mark earlier this week, with WTI futures surging across the threshold on Thursday for the first time since May 21 after Iran-aligned Houthis seized control of Yemen’s port city of Mocha and advanced down the Red Sea coast to strategic islands.

Against the yen, the US dollar was as much as 0.1% firmer at 154.615 yen, while the euro strengthened by a similar magnitude to as much as 179.49 yen after the European Central Bank hiked interest rates on Thursday for the second time this year.

But the Japanese currency regained some strength after data released on Friday showed wholesale inflation rose 7.6% in August from a year earlier, bolstering the case for a rate hike this month.

The Australian dollar was flat at US$0.7160, while its kiwi counterpart was up 0.1% at US$0.5805.

Both the euro and the British pound were level against the dollar at US$1.1613 and US$1.3510, respectively.

Pressure builds on Federal Reserve

Markets are awaiting the release of US CPI data later on Friday, one of the last major economic data points released before the Federal Reserve meets next week.

Fed funds futures are pricing an implied 71.3% probability of a 25-basis-point hike at the U.S. central bank’s next two-day meeting ending on Sept 16, compared to a 61.2% chance in the previous trading session, according to the CME Group’s FedWatch tool.

Fixed-income markets remained uneasy after the US treasury department tripled the size of its long-dated bond repurchase, with a gauge of bond volatility rising to its highest level in a month. The yield on US 10-year government bonds was up 2.3 basis points at 4.965%.

“10-year US Treasury yields are within striking distance of 5%, as the markets have reassessed the Fed’s path higher while term premium is appropriately hovering near pre-GFC levels,” Barclays analysts wrote. “We remain of the view that bonds are not cheap yet and catalysts for a rally do not appear imminent.”

In cryptocurrencies, bitcoin was down 0.8% at US$76,624.32, while ether declined by a similar magnitude to US$2,443.18.

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