Dollar firms as oil climbs, bond rout saps risk appetite

By Jiaxing Li

HONG KONG, May 18 (Reuters) – The dollar firmed against most major currencies on Monday as fresh Middle East tensions lifted oil prices and a global bond selloff dented risk appetite, while yen weakness kept traders on alert for possible Japanese intervention.

The euro was last at $1.1609 and sterling fetched $1.3305, both down more than 0.1%.

The risk-sensitive Australian dollar weakened 0.4% to $0.7121, while the New Zealand dollar was little changed at $0.5827.

The dollar index, which measures the greenback against a basket of major currencies, was a touch firmer at 99.393.

Oil prices climbed on Monday, with Brent crude futures rising more than 1% to over $110 a barrel, after a nuclear power plant in the United Arab Emirates came under attack and efforts to end the U.S.-Israeli war with Iran appeared to have stalled.

“It appears conditions for risk and bonds are deteriorating, and conditions for the dollar rally to extend this week are ripe,” analysts at Barclays wrote in a note.

Signs that the Strait of Hormuz will remain clogged for longer are also exerting upward pressure, with the dollar gaining 0.5% to 1% for every 10% rise in oil prices, they added.

A global bond rout also dented risk sentiment, showing little sign of recovery, with Treasury yields staying elevated amid fears that Middle East energy disruptions could fuel inflation.

The yields on benchmark U.S. 10-year notes and the two-year notes, which typically move in step with interest rate expectations for the Federal Reserve, were last at 4.607% and 4.085%, respectively, near their highest in a year.

“Near term, USD may stay better bid on dips if yields remain elevated and markets continue to price a more hawkish Fed reaction function,” Christopher Wong, FX strategist at OCBC, said in a note.

The focus this week will turn to the Federal Open Market Committee’s minutes and U.S. flash Purchasing Managers’ Indexes, which could help clarify how much concern there is within the Fed over persisting inflation, and whether U.S. activity momentum is holding up under tighter financial conditions, he added.

Against the yen, the dollar traded at 158.84, up 0.04% from late U.S. levels, with renewed yen weakness putting investors on alert for possible intervention.

The offshore yuan traded at 6.8163 yuan per dollar ahead of Chinese activity data due later on Monday.

(Reporting by Jiaxing Li in Hong Kong; Editing by Jacqueline Wong)