FOREX-Dollar choppy as investors weigh oil drop against Fed rate path

The dollar was slightly higher ‌on Tuesday, ​but off a two-month high hit earlier in the day as investors weighed another decline in oil prices against the possibility of more rate hikes from the Federal Reserve. Oil prices were down more than 2% to a two-week low following Iran's proposal to reopen the ‌Strait of Hormuz within seven days if the US eases military pressure.

In addition, Iran and the United States hinted at the prospect of reviving negotiations to end their conflict, with the presidents of both countries due at the UN General Assembly in New York. "Obviously, the big bogeyman for everybody is inflation, but it's all been about why is there so much inflation?" said Juan Perez, senior director ‌of trading at Monex USA in Washington. "It's all due to the Iranian conflict going on so long, the escalation. So this is where markets are right now, and ‌this is why you're seeing the dollar not really have any clear direction."

US President Donald Trump will use the UN General Assembly address to argue that the war with Iran prevented Tehran from obtaining a nuclear weapon and to tout what he sees as progress toward peace and a global order increasingly aligned with American interests, according to a White House official. The ongoing US-Israeli war on Iran had sent oil prices higher and fanned inflation worries, prompting rate ⁠hikes from several ​central banks in recent days, including the ⁠Federal Reserve.

Recent comments from Fed officials in the wake of its policy decision have also flagged the possibility of more rate increases if inflation does not cool. Federal Reserve Bank of Boston President Susan Collins wrote on Tuesday in a ⁠LinkedIn post that she supported last week’s central bank interest rate increase amid the risks that future inflation will be above its 2% target.

The dollar index, which measures the greenback against a basket of currencies, rose ​0.06% to 100.48, with the euro down 0.08% at $1.1453. The dollar index had risen as much as 0.25% on the day to 100.66, its highest since July ⁠30, while also falling as much as 0.11%. Analysts at Morgan Stanley said in a note that options pricing data in the week ending September 18 indicated that investors increased long positions in the dollar index and increased short positions in the ⁠euro.

Markets ​are roughly split on whether the Fed will raise rates at its October meeting, pricing in a 53.1% chance for a hike of at least 25 basis points, down from 57.6% in the prior session, according to CME FedWatch. Other Fed officials speaking on Tuesday include Federal Reserve Bank of New York President John Williams, Federal Reserve Vice Chair Philip Jefferson and ⁠Federal Reserve Bank of Richmond President Thomas Barkin.

Against the Japanese yen, the dollar weakened 0.06% to 157.26. Traders were also weighing whether the Bank of Japan would raise rates quickly enough to ⁠narrow the gap with its global peers.

Despite the BOJ's ⁠rate hike last week, the Japanese currency has been under pressure. Investors view the dissent from two policymakers, who pushed for a more cautious pace, as a warning that additional hikes may be harder to implement. Sterling weakened 0.06% to $1.3357 and was on track for a second ‌straight daily decline, and sixth ‌in the past seven.