Dollar holds near 2-month high as markets weigh rate hikes, Iran diplomacy

The recent barrage of rate hikes and ​hawkish rhetoric from major central banks has taken centre stage in currency markets as the US-Israeli conflict with Iran ​drives oil prices higher and fans inflation worries. Investors are now anticipating further tightening from central ⁠banks, with Federal Reserve officials flagging the possibility of more hikes if inflation does not ease.

"The dollar's support from ​rates looks durable, but futures already price more tightening than the Fed's own projections, so the dollar now needs the data ​to confirm it," said Kieran Williams, head of Asia FX at Intouch Capital Markets.

Oil markets remain in the spotlight with Brent crude futures at $99.22 per barrel on hopes that diplomacy at the UN General Assembly could pave the way for a resolution to the Middle East war. Brent ​has risen 37% since the conflict erupted at the end of February.

US President Donald Trump warned that he could ​annihilate Iran if there is no deal to end the war, but also suggested an agreement could come soon amid the diplomatic efforts at the ‌UN."The ⁠good news is that oil prices have moderated somewhat from the highs but the path forward remains unclear given the lack of clarity around a possible resolution of the conflict," said Michael Wan, a currency analyst at MUFG.Investors are also waiting for a high-stakes meeting between Trump and Chinese President Xi Jinping as the two leaders seek stability in a relationship ​under pressure over wide-ranging issues.

The Japanese ​yen was at 157.55 ⁠per US dollar as traders remain wary of the threat of intervention as markets judged the Bank of Japan's rate hike to a 31-year high last week as insufficiently hawkish.

Two dissenting ​votes and the absence of a clear hawkish signal were enough to fuel doubts over how ​quickly the BOJ ⁠will tighten policy, particularly after the Fed raised rates last week and flagged further hikes ahead.

Japanese markets are closed for a holiday and the low liquidity period is seen by analysts as an optimal time for authorities to intervene if needed. "The BOJ hike didn't narrow ⁠the (yield) gap ​because the Fed hiked by the same amount two days earlier, so ​the lean is still higher," said Intouch's Williams.

"160 (per US dollar) remains the risk, but officials have reportedly moved away from telegraphing intervention and from any ​fixed level, so the cap could come earlier and in other forms. "