Currencies slide as Middle East risks dampening rate hike optimism By Reuters

By Rae Wee

SINGAPORE (Reuters) – The dollar rose on Tuesday and major currencies traded sideways as lingering concerns over tensions in the Middle East partially offset investor optimism over impending U.S. interest rate cuts.

Geopolitical risks kept the currency’s initial moves in check, although fears of an escalation of the conflict following a major missile exchange between Israel and Hezbollah faded over the weekend.

The yen was last down 0.2 percent at 144.82 per dollar, giving up some of the haven gains of the previous session that saw it hit a three-week high of 143.45 per dollar.

The euro and the British pound eased slightly to $1.1161 and $1.3182 respectively, although both were not far from their recent multi-month highs.

The Canadian dollar was little changed at 1.3487 per US dollar after rising to a five-month high overnight as oil prices rose.

“The market is taking a break and waiting to see key data,” said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:).

“Also, given that we have kind of second-tier data releases this week, it plays into the prospect of a more varied kind of environment in the near term.”

Still, major currencies were holding close to record highs and the dollar was nearing its lowest level in more than a year, helped by the likelihood of a US interest rate cut in September after Federal Reserve Chairman Jerome Powell gave more or less the nod to such a move in Jackson Hole. Friday speech

San Francisco Fed President Mary Daly also said Monday that a quarter-percentage-point cut in borrowing costs next month was likely.

Against a basket of currencies, the greenback was 0.05% higher at 100.90, hovering near a 13-month low of 100.53 hit in the previous session.

The Fed’s aggressive rate hike cycle and expectations of how much more US rates might rise have been a huge factor in the dollar’s strength over the past two years, keeping other currencies, particularly the Japanese yen, under pressure.

“The question now is no longer whether the Fed will cut in September, but how much,” said David Chao, Invesco’s Asia Pacific ex-Japan global market strategist.

“Powell has left the door open for bigger cuts if working conditions deteriorate. Investors believe the Fed appears open to cutting rates faster than previously expected.”

Markets have already fully priced in a rate cut next month and see an easing of about 100 basis points by the end of the year.

Elsewhere, the Australian dollar fell 0.05% to $0.6768, although it remained not far from the one-month high of $0.67985 hit on Friday.

The New Zealand dollar fell 0.08% to $0.6199, but similarly was not far from Friday’s high of $0.6236, the strongest level in seven months.