CORRECTED-FOREX-Dollar near six-week high amid Iran war jitters

Traders are increasingly concerned that ongoing energy disruptions will filter through to core consumer prices, potentially forcing a tighter monetary policy response. "The key question now, of course, ‌is if the Fed is going to hold," said Noel Dixon, global macro strategist at State Street.

​The dollar held near six-week highs on Friday as traders weighed the prospects of a near-term deal to end the Middle East war and assessed whether the Federal Reserve would raise interest rates if inflation continued to accelerate.

Iran's foreign minister met ‌with Pakistan's interior minister to discuss proposals to end the U.S.-Israeli conflict, Iranian media reported. The two sides remain at odds over Tehran's uranium stockpile and control of the Strait of Hormuz. Traders are increasingly concerned that ongoing energy disruptions will filter through to core consumer prices, potentially forcing a tighter monetary policy response.

"The key question now, of course, ‌is if the Fed is going to hold," said Noel Dixon, global macro strategist at State Street. So far, inflation pressures feeding into the Fed's preferred gauge — Personal ‌Consumption Expenditures — have remained relatively contained, Dixon said, supporting the case for keeping rates on hold. However, he cautioned that "the risk to my view is that Trump resumes attacks on Iran in an aggressive fashion. That could be a catalyst for greater interest rate volatility, and that could cause the Fed to panic and seriously consider a hike."

Fed funds futures traders are pricing in 54% odds of a rate hike by ⁠December. The dollar ​index, which measures the greenback against ⁠a basket of currencies including the yen and the euro, rose 0.09% to 99.28, with the euro down 0.12% at $1.1604. The pound gained 0.08% to $1.344, having shrugged off data earlier that showed retail sales dropped by ⁠the most in nearly a year in April, as consumers felt the pinch of the inflationary effects of the Iran war.

Countries more exposed to rising energy costs face mounting growth concerns, ​lending further support to the U.S. dollar over its peers. Australia, for instance, is grappling with shortages of jet fuel and diesel that are likely to ⁠weigh on several key industries, Dixon noted. The Australian dollar weakened 0.27% versus the greenback to $0.7128.

UNDER PRESSURE The U.S. dollar's strength and persistently high oil prices have spelled pain for the yen, which on Friday weakened 0.06% against the ⁠greenback ​to 159.1 per dollar.

The yen remains fragile even after what was likely intervention by Tokyo just weeks ago to prop it up — it has since surrendered nearly 75% of those gains, keeping traders on alert for further action by Japanese authorities. "It's just buying time, really. What they need is a change in fundamentals, and ⁠I think the best thing that could happen is a quick deal to end the Iran conflict," said Lee Hardman, a currency strategist at MUFG.

The Bank of ⁠Japan is expected to raise borrowing costs ⁠only gradually, while other central banks — including the European Central Bank — are likely to move far more quickly, putting the yen at a disadvantage with yield-seeking investors. Data on Friday showed Japan's core inflation slowed to a four-year low in April, complicating the ‌outlook for BOJ policy.