FOREX-Dollar firms as oil surges, Fed raises inflation alarm; yen slips past 160

The hawkish shift sent yields ‌sharply higher, with those on 2-year note and the 10-year both clinging to their highest levels since March 27. "The move-up in oil prices is making the market a little bit more nervous" as a lack of energy supplies ultimately translates to challenges for the economy, said Rodrigo Catril, currency strategist at National Australia Bank in Sydney.

The dollar climbed to its highest ‌in ​more than two weeks on Thursday as hawkish signals from the Federal Reserve and a surge in oil to four-year highs intensified inflation fears, while the yen's break above 160 per dollar sharpened intervention risks. Brent crude futures rose to their highest since March ‌2022, driven by anxiety over further supply disruptions after a report the U.S. is considering military action against Iran to break the deadlock in ceasefire negotiations.

That came on top of a hawkish tilt at Federal Reserve, where Chair Jerome Powell closed out his eight years with rates on hold amid growing inflation concerns. The Fed's 8–4 decision to leave the rate ‌unchanged was its most divided since 1992, drawing three dissents from officials who no longer think the bank should communicate a bias towards easing. The hawkish shift sent yields ‌sharply higher, with those on 2-year note and the 10-year both clinging to their highest levels since March 27.

"The move-up in oil prices is making the market a little bit more nervous" as a lack of energy supplies ultimately translates to challenges for the economy, said Rodrigo Catril, currency strategist at National Australia Bank in Sydney. "The dollar is now being supported by both risk aversion as well as higher U.S. treasury yields."

Catril ⁠said the ​divisions within the Fed reflected growing concern that the ⁠Iran conflict could push up inflation, pressuring the central bank's easing bias. The dollar index climbed 0.2% to a high of 99.06, the strongest level since April 13. Still, the greenback is on track for a ⁠0.8% loss this month after two monthly gains, as markets had earlier priced in optimism over a potential resolution to the Iran conflict.

The euro weakened to a near three-week low of $1.1661 , and sterling ​was down 0.1% to trade at $1.3463. The Australian dollar fetched $0.712, and the New Zealand dollar was at $0.5828, largely steady.

The Bank of England and European Central Bank ⁠will also meet later today, with markets closely watching their guidance as expectations grew that both may be forced to raise rates soon. "A short-lived oil spike is something markets can look through, but a longer Hormuz disruption ⁠changes ​the equation because it feeds into transport costs, corporate margins, inflation expectations and central bank reaction functions," said Charu Chanana, chief investment strategist at Saxo.

JAPAN INTERVENTION WATCH The yen weakened to a fresh low since July 2024 at 160.58 per dollar, edging closer to levels that have previously triggered intervention, despite the Bank of Japan signalling after its policy meeting ⁠on Tuesday that it could raise rates in coming months.

The Japanese currency has fallen more than 2% since the war began on February 28, and investors have built the ⁠biggest short yen position in nearly two years ⁠in a bet that neither rate hikes nor risk of intervention will come to its rescue. "While this brings the pair closer to intervention territory, the Ministry of Finance will be wary of firing its intervention bullets too early given Japan's vulnerability as a large ‌energy importer and the current ‌stalemate in the Middle East," analysts at IG said in a note.