Dollar hits new 40-year high versus yen, euro lower after ECB decision

By Chuck Mikolajczak

NEW YORK, July 23 (Reuters) – The dollar hit a fresh 40-year high against the yen and was stronger against the euro as oil prices continued to climb on rising hostilities in the Middle East and the European Central Bank kept interest rates unchanged.

Oil prices rose for a fifth straight day, with Brent touching the $100 a barrel mark for the first time since May 26, as Yemen’s Houthis said they struck two Saudi oil tankers, increasing the possibility of a second bottleneck on global oil supplies alongside the near-shuttered Strait of Hormuz.

The dollar has been rising in recent days as renewed strikes in the U.S.-Iran conflict have caused a reversal in oil prices and again fanned inflation fears, in turn buoying expectations the Federal Reserve may hike interest rates.

The U.S. economy is seen as more insulated from energy price shocks compared with Europe and Japan, which has also supported the dollar.

The dollar index, which measures the greenback against a basket of currencies, rose 0.32% to 101.47, with the euro down 0.35% at $1.137. The dollar was on track for its biggest daily percentage gain in a month.

U.S. crude jumped 5.41% to $91.51 a barrel and Brent was at $100.42 per barrel, up 6.75% on the day.

ECB HOLDS RATES STEADY

The ECB kept interest rates unchanged as expected but held the door open to another increase in September, as a fresh jump in energy prices threatens to keep inflation well above its 2% target. President Christine Lagarde said “while developments in underlying inflation have remained contained, the full effects of the energy shock have yet to play out”.

“(Lagarde) said the risks of a weakened economy are high and the risks of higher inflation are high, but given that, they’re not raising rates, so of course, the dollar’s continuing to strengthen,” said Joseph Trevisani, senior analyst at FXStreet in New York.

“So what are we pricing in here — are we pricing in higher prices in oil, which you’ve already seen, or are we pricing in the possibility of disruption, which does exist? Anytime there’s an active shooting war, things are not very predictable.”

The recent rebound in oil prices, along with comments from multiple Fed officials, including Chair Kevin Warsh, that have flagged concerns about inflation pressures over labor market concerns, have helped push market expectations for rate hikes from the central bank higher.

MARKETS PRICE IN SEPTEMBER MOVE

U.S. data on Thursday showed weekly initial jobless claims dropped by 22,000 to a seasonally adjusted 187,000, according to the Labor Department, the largest decline in three months and well below the 212,000 estimate of economists polled by Reuters.

Markets are currently pricing in a 37.9% chance for a rate hike of at least 25 basis points at the Fed’s policy meeting next week, up from 11.8% a week ago, according to CME FedWatch. For the September meeting, expectations for a hike have climbed to 83.2%, up from 52.4% a week ago.

The Japanese yen weakened 0.49% against the greenback to 163.93 per dollar after touching 163.96, its softest level since November 1986, with expectations of a more deliberate approach to rate hikes at the Bank of Japan compared with its global counterparts. Markets are pricing in about 25 basis points of hikes from the central bank this year, according to LSEG data.

However, Japan’s 2-year government bond yield hit a 31-year high on Thursday on growing bets that the BOJ would accelerate the pace of interest rate hikes.

Japan’s finance minister reiterated the government was prepared to take decisive action on foreign exchange as needed, after carrying out yen-buying operations in April and May, with the yen weakening beyond the 160 level.

(Reporting by Stefano Rebaudo; additional reporting by Satoshi Sugiyama; Editing by Thomas Derpinghaus, Hugh Lawson and Emelia Sithole-Matarise)