FOREX-Dollar whipsawed by conflicting Iran deal signals

The dollar's recent rise has pushed the yen back toward the 160 level that prompted Japan's first currency market intervention in nearly two years last month. The Bank of ⁠Japan should raise interest rates at an "appropriate pace" ⁠as price pressures from the Middle East war may push underlying inflation above its 2% target, board member Junko Koeda said, bolstering the case for a rate hike as soon as June.

The dollar index was flat on ‌Thursday ​as traders weighed the likelihood of a near-term deal to end the Middle East war, having earlier touched a six-week high on doubts a breakthrough was close. The greenback had climbed after a Reuters report that Iran's Supreme Leader issued a directive barring the export of the country's near-weapons-grade uranium.

It ‌then surrendered those gains on unconfirmed reports that Washington and Tehran have agreed on a final draft of an agreement to end the war. President Donald Trump said the U.S. will eventually recover Iran's stockpile of highly enriched uranium, which Washington believes is destined for a nuclear weapon, though Tehran says it is intended purely for peaceful purposes.

Prolonged energy disruptions as the war drags on threaten to feed through to core U.S. ‌consumer prices and inflation expectations, potentially pushing the Federal Reserve toward rate hikes. That has boosted the dollar, which is correlated to Treasury yields and also benefits from a safe-haven bid. A stronger ‌U.S. growth outlook is adding further weight to the case for tightening and boosting the greenback, even as other economies around the world face a weaker trajectory and greater exposure to elevated energy costs.

“We’re almost three months from the start of the oil shock and typically that's when global growth starts to see a bit of a deterioration, so we're a bit hesitant on global growth exposed currencies,” said Noah Buffam, director in FICC strategy at CIBC Capital Markets in Toronto. Weak PMIs in ⁠Europe, the UK ​and Japan on Thursday underscored that unease, boosting the ⁠dollar on the back of its comparatively stronger outlook.

“A lot of them came in below expectations,” said Buffam. “Going forward we might see a little bit more growth weakness.” Economic activity in the euro zone shrank at its sharpest rate in ⁠more than 2-1/2 years in May, as a war-driven surge in living costs hammered demand for services and firms accelerated layoffs.

Even so, rate hikes likely lie ahead, said Andrew Kenningham, chief Europe economist at Capital Economics. "There is nothing ​here to put the European Central Bank Governing Council off its plans to raise rates by 25 bps in June, nor anything to ease concerns about the risks of a recession," ⁠Kenningham said.

British companies are suffering their most widespread drop in activity in over a year, while Japan's manufacturing sector slowed slightly in May and service sector growth ground to a halt for the first time in over a year. The dollar index, which ⁠measures ​the greenback against a basket of currencies including the yen and the euro, was unchanged on the day at 99.13, with the euro down 0.03% at $1.1624.

Sterling strengthened 0.07% to $1.3441. In the U.S., data showed that the number of Americans filing claims for unemployment benefits fell last week, pointing to labor market resilience and giving the Federal Reserve room to focus on rising inflation.

The Japanese yen weakened 0.01% against ⁠the greenback to 158.92 per dollar. The dollar's recent rise has pushed the yen back toward the 160 level that prompted Japan's first currency market intervention in nearly two years last month.

The Bank of ⁠Japan should raise interest rates at an "appropriate pace" ⁠as price pressures from the Middle East war may push underlying inflation above its 2% target, board member Junko Koeda said, bolstering the case for a rate hike as soon as June. Separately, the Bank of Japan's survey of investors showed some requests to pause its bond taper plan, as sharp ‌swings in bond markets overshadow a review ‌of its quantitative tightening strategy due next month.