By Jiaxing Li
HONG KONG, March 20 (Reuters) – The dollar slipped from multi-month highs this week as soaring energy prices upended the outlook for global interest rates, with the U.S. Federal Reserve left alone as the only major central bank that is not expected to raise rates this year.
Before the U.S.-Israeli war on Iran began at the end of February, investors expected two Fed cuts this year and now they believe one is a distant prospect. Yet the outlook for other major central banks has turned even more hawkish – even faster.
The euro, yen, sterling, Swiss franc and Australian dollar headed for weekly gains against the greenback as policymakers laid the groundwork for higher interest rates in response to the war in the Middle East, which has choked oil and gas supplies.
The euro, marginally softer at $1.1558 in the Asia morning, is up 1.2% for the week. The yen, which eased to around 158 per dollar, has gained 0.9% and sterling, hovering at $1.3408, is up 1.4%.
Benchmark Brent crude futures are up nearly 50% since the U.S. and Israel attacked Iran, which has all but closed the sea lane for Middle East energy exports.
The European Central Bank kept rates on hold on Thursday but warned of inflation driven by energy prices and sources told Reuters policymakers are likely to start discussing hikes next month – a contrast with the Fed’s wait-and-see approach.
Investors swept away expectations for a long hold on European rates at 2% to price in a hike by June.
“The Fed is signalling a longer pause if inflation stays sticky; the ECB is opening the door to insurance hikes,” said Wei Yao, global chief economist and head of Asia-Pacific research at Societe Generale, in a note to clients.
The Bank of England kept rates on hold as well, but set off one of the sharpest ever routs in short-dated gilts by saying it was ready to act and markets, which had seen rates drifting lower, have priced 80 basis points of hikes by year’s end.
Earlier on Thursday, the Bank of Japan left the door open to a hike as soon as April, wrongfooting investors who had bet on a further slide in the yen – and helping to lift the currency.
The Australian dollar was trading just shy of 71 cents on Friday for a weekly gain of 1.5%, after the Reserve Bank of Australia hiked interest rates for the second time in as many months and investors expect there is more to come.
Crude prices dipped slightly on Friday after U.S. President Donald Trump told Israel not to repeat attacks on Iranian energy infrastructure, after a round of tit-for-tat strikes that left a Qatari gas plant crippled.
The Fed left rates on hold, as expected, earlier this week but Chair Jerome Powell said it was too soon to know the scope and duration of any economic fallout from the war.
The dollar index was steady at 99.46 and on track for a 1% weekly decline, its largest since late January. Still, many analysts think a prolonged fall is unlikely.
“The longer the war drags on, the higher the U.S. dollar will go, because it will benefit from safe-haven demand arising from higher uncertainty (and) also from the U.S. being an energy exporter,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.
(Reporting by Jiaxing Li in Hong Kong. Editing by Tom Westbrook and Thomas Derpinghaus)
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