Geopolitical Tensions Drive Dollar Surge, Pound Drops as BoE Cuts Rates

The dollar rose on Thursday due to increased geopolitical tensions, while the British pound fell after the Bank of England cut interest rates. Heightened concerns about conflict in the Middle East, alongside a dovish stance from Federal Reserve Chair Jerome Powell, supported the dollar's safe-haven appeal. The yen and cryptocurrencies also saw significant market movements.

The dollar rose on Thursday as escalating geopolitical tensions increased its safe-haven appeal, while the British pound fell after the Bank of England cut interest rates from a 16-year high. Concerns about a broader conflict in the Middle East intensified after Hamas leader Ismail Haniyeh was assassinated in Tehran on Wednesday morning, sparking threats of retaliation against Israel.

'We are looking at the threat of outright conflict breaking out in the Middle East,' said Karl Schamotta, chief market strategist at Corpay in Toronto. 'That is supporting the dollar's safe-haven appeal.' The dollar also rebounded from a selloff on Wednesday after dovish comments by Federal Reserve Chair Jerome Powell at the end of the U.S. central bank's two-day meeting.

'Although Jerome Powell was extremely dovish in the press conference, the statement released by the Federal Open Market Committee really sounded more balanced,' said Schamotta. Powell mentioned that interest rates could be cut as soon as September if the U.S. economy follows its expected path. The Fed's policy statement on Wednesday noted 'some further progress toward the (Federal Open Market) Committee's 2% objective,' while highlighting the unemployment rate of 4.1% 'remains low.'

Traders are now fully pricing in three 25-basis-point rate cuts by year-end, anticipating one cut at each of the Fed's September, November, and December meetings. The next significant U.S. economic release, Friday's jobs report for July, is expected to show that employers added 175,000 jobs and that the unemployment rate will stay steady at 4.1%.

Data on Thursday indicated that the number of Americans filing new applications for unemployment benefits rose to an 11-month high last week. The dollar index rose 0.35% to 104.41.

Tumbling stocks also likely increased the safe-haven appeal of the U.S. currency. Sterling fell 0.96% to $1.2733, its lowest level since July 3, after the Bank of England cut rates following a tight vote by policymakers split over whether inflation pressures had sufficiently eased.

Governor Andrew Bailey led the 5-4 decision to reduce rates by a quarter-point to 5%, indicating a cautious approach going forward. 'If you look at the headlines that Bailey produced: caution on cutting too quickly or by too much, it implies to me that they're looking at a steady quarterly pace of reductions,' said Colin Asher, economist at Mizuho.

The euro touched a three-week low of $1.07775, down 0.36% at $1.07865. The Japanese yen edged higher, following a dramatic rise after the Bank of Japan's decision to hike rates to 0.25%, the highest since 2008.

The yen has surged since hitting a 38-year low of 161.96 against the dollar on July 3, buoyed by interventions from Japanese authorities and traders unwinding carry trades. The dollar fell 0.21% to 149.65 yen, after earlier reaching 148.51, the lowest since March 15.

In cryptocurrencies, bitcoin fell 2.68% to $62,848.

(With inputs from agencies.)