The US dollar held steady at high levels on Wednesday, amid concerns that energy prices will continue to rise due to the conflict in the Middle East, boosting demand for the currency as a global safe haven.
The dollar index, which measures the performance of the US currency against a basket of six other currencies, traded at 98.995, down slightly after earlier hitting its strongest level since November 28.
The conflict in the Middle East, which began with coordinated strikes by the United States and Israel on Iran over the weekend followed by Iranian retaliatory attacks, has raised concerns about key energy flows through the Strait of Hormuz, sparking fears of continued supply disruptions.
Crude oil prices rose sharply as a result of these risks, raising concerns about increased global inflation.
ING Bank stated that the dollar rose this week based on the factors mentioned above, with the dollar index trading at 99.68 yesterday. They believe investors are unlikely to want to see the dollar reach the 100.00/100.35 levels seen over the past eight months. However, they added that a clear improvement in the energy sector's performance is needed before investors are willing to re-enter short positions in the dollar.
The Dutch bank added that the drivers of short-term risk in the market will depend on whether energy prices can fall if the Strait of Hormuz is reopened, and whether central banks will be able to cut interest rates to support economic activity, or at least not tighten monetary policy.
Economic data on Wednesday includes the release of the ADP private sector jobs report and the Federal Reserve Beige Book ahead of the Open Market Committee meeting in mid-March.
ING noted that any signs of continued price pressures could cause the market to reduce its expectations by the amount of the Federal Reserve's two interest rate cuts this year.
In Europe, the euro-dollar pair traded 0.1% higher at 1.1616, after earlier hitting its weakest level since late November, following data on Tuesday showing that eurozone inflation exceeded expectations in February before the start of the conflict with Iran.
The pound-dollar currency pair rose 0.1% to 1.3363, but remained near its lowest level since last December.
In Asia, the dollar/yen currency pair traded down 0.1% at 157.47, but remained near its five-week high reached in the previous session.
The dollar/yuan currency pair traded 0.2% higher at 6.9128, marking its fourth consecutive day of gains.
The US dollar-Australian dollar pair fell 0.3% to 0.7026, as the risk-sensitive Australian dollar continued to weaken.
