The U.S. dollar came under pressure on Wednesday as the Japanese yen held near its strongest level since February, while Brent crude moved close to $100 per barrel amid a widening conflict in the Middle East.
According to Reuters, the yen remained firm after gaining about 4% over the past week, while the dollar index slipped to 98.75, close to its lowest level in almost two weeks.
The movement in currencies came as global markets reacted to renewed tensions in the Middle East. Iranian-backed Houthis in Yemen launched strikes on several Saudi Arabian cities, while U.S. forces attacked Iranian oil tankers and Tehran struck a U.S. base in Jordan.
The escalation pushed Brent crude futures up more than 1% to about $99 per barrel, raising fresh concerns about the impact of higher energy prices on inflation and global monetary policy.
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Softer U.S. Inflation Keeps Dollar Near One-Month Low Despite Middle East Tensions
Investors are also preparing for a U.S. inflation report due later this week, which is expected to influence expectations ahead of central bank meetings in the United States and Japan.
The dollar weakened modestly, although analysts said part of the decline reflected the yen’s sharp rise and investor positioning ahead of those meetings.
The euro remained steady at $1.1631, while the British pound traded at $1.3546.
The European Central Bank is widely expected to raise interest rates on Thursday, adding another important monetary policy decision to a week already dominated by concerns about inflation, oil prices and interest rates.
OCBC strategists said the latest escalation in the Middle East has renewed attention on how higher energy costs could influence the U.S. Federal Reserve.
That concern has grown after strong U.S. employment figures revived expectations that the Fed could raise interest rates next week.
The yen has emerged as one of the strongest-performing major currencies this month.
It traded at about 153.33 per dollar, close to the seven-month high of 152.89 reached on Tuesday.
The Japanese currency has also strengthened against the euro, sterling and several currencies frequently used in carry trades, where investors borrow cheaply in yen and invest in higher-yielding assets elsewhere.
Expectations of tighter monetary policy from the Bank of Japan have helped drive the rally.
Markets widely expect the BOJ to increase interest rates by 25 basis points at its September 17 and 18 meeting.
Analysts said the next stage of the yen’s rally will depend on whether Bank of Japan Governor Kazuo Ueda signals that further tightening could follow.
Aninda Mitra, head of Asia macro and investment strategy at BNY Investments, said movements in the yen will also depend heavily on expectations for U.S. interest rates.
He said the yen’s estimated fair value could be in the 140s against the dollar, meaning further strengthening would not necessarily be unexpected.
However, analysts also warned that the yen still faces risks from strong U.S. economic data, higher energy prices and concerns about Japan’s public debt.
Elsewhere, the Australian dollar rose 0.15% to $0.72265, while the New Zealand dollar gained 0.16% to $0.5862.
China’s yuan also traded near a three-and-a-half-year high against the dollar, supported by stronger-than-expected inflation figures and faster export growth.
What This Means For Africa
The rise in oil prices towards $100 per barrel could have mixed consequences for African economies.
Oil-exporting countries could benefit from stronger crude prices through higher export earnings and government revenue, particularly if elevated prices are sustained.
For fuel-importing African economies, however, higher oil prices could increase import bills, transport costs and inflation pressures.
A weaker U.S. dollar could also affect African markets differently depending on each country’s exposure to dollar-denominated debt, imports and commodity exports.
The combination of higher oil prices, tighter global monetary policy and volatile currencies could therefore shape borrowing costs, inflation and trade conditions across the continent in the coming weeks.
Much will depend on whether the Middle East conflict escalates further and how major central banks respond to renewed inflation risks.
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