Investing.com – The U.S. dollar hovered near a one-week high on Tuesday, while the British pound gained ground and the euro stabilized, as currency traders balanced fresh escalations in the Middle East against tentative hopes for regional diplomatic progress.
The U.S. Dollar Index, which measures the greenback against a basket of six major developed peers, was steady at 100.93 after scaling its highest level since July 15 during the previous session.
Elevated U.S. Treasury yields continued to underpin the greenback, with the benchmark 10-year yield hovering near 4.59% and the 30-year yield holding above 5%. Fixed-income markets remain wary that prolonged energy disruptions could reignite broader consumer inflation and force central banks to keep interest rates higher for longer.
“Dollar risks remain skewed to the upside today as markets continue to display a risky degree of complacency towards the military re-escalation,” said Francesco Pesole, FX strategist at ING.
The British pound managed to outperform its major European peers, edging up 0.1%.
Sterling drew independent support after newly installed UK Prime Minister Andy Burnham publicly pledged to maintain strict fiscal discipline and adhere to existing fiscal rules. City investors reacted favorably to the administration’s fiscal pragmatism, keeping the currency on a firm footing ahead of crucial domestic wage data.
Meanwhile, the euro firmed slightly to $1.1420, consolidating in a tight range as markets positioned for Thursday’s European Central Bank monetary policy meeting.
While policymakers in Frankfurt are widely expected to leave key interest rates unchanged, energy-driven inflation risks are expected to keep ECB President Christine Lagarde from signaling any imminent policy easing.
Geopolitical risks remained the primary volatility driver across foreign exchange desks. U.S. Central Command confirmed it had completed its ninth consecutive night of military strikes targeting Iranian command centers and maritime infrastructure.
Compounding those anxieties, Yemen’s Iran-aligned Houthis announced a new naval blockade on Saudi Arabia, raising fresh threats to global oil transport corridors.
Crude oil prices swung sharply near six-week highs before easing, as traders weighed the Houthi blockade against reports that mediators had presented Tehran with a 10-day ceasefire proposal.
The temporary retreat in oil prices helped cap safe-haven inflows into the dollar, allowing European currencies to hold their ground.
Traders are also keeping a close eye on central bank calendars over the coming fortnight.
Following Thursday’s ECB meeting, global attention will shift to next week’s Federal Reserve policy meeting, where markets are pricing in an 85% probability that U.S. policymakers will keep rates on hold while assessing the inflationary fallout from Middle East energy volatility.
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