New York Forex Market: Dollar Strengthens Amid Safe-Haven Demand and Rising U.S. Bond Yields

The dollar rose on Thursday, reaching a one-week high, supported by increased safe-haven demand and a rise in U.S. bond yields. Markets are quietly awaiting the release of key employment data on Friday. Meanwhile, the yen fell below 158 yen, the first time since Japanese authorities intervened in the forex market last week.

In New York's final trading session, the U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, rose 0.3% to 99.94. It had fallen to a seven-week low in the previous trading session.

The dollar had weakened slightly earlier this week as investors shifted to riskier assets like stocks, driving a strong start to August after a lackluster performance in July on Wall Street.

Additionally, markets expect the Strait of Hormuz to reopen, which has driven oil prices down and boosted market risk appetite.

However, oil prices rebounded significantly on Thursday. Media reports indicate that a framework for reopening the Strait of Hormuz, agreed upon by Iran and Oman, would ban U.S. ships from passing until related compensation is completed.

Iran's Fars News Agency, citing lawmaker Alireza Salimi, reported that the initial text of the Hormuz Strait plan is currently under review by authorities. According to the plan, until compensation is completed, ships from the U.S., Israel, and other 'hostile countries' will not be allowed to pass through this important waterway.

Fars News Agency also cited an Iranian Foreign Ministry source as saying that, under the plan, ships will enter the Strait of Hormuz via the northern route near the Iranian coast and exit via the southern route near the Omani coast. After a specific period, both routes will be closed and replaced by the central route, at which time Iran will be responsible for entry management, and exit will be jointly managed by Iran and Oman.

If the above plan is true, some of its contents are expected to be difficult to gain Washington's acceptance.

U.S. President Trump said earlier this week that he had canceled a planned strong military attack on Iran due to progress in peace agreement negotiations, but also warned that if the two sides cannot reach an agreement, the U.S. is 'ready to take action.' Since the war broke out at the end of February, the U.S. and Iran have continued to engage in a cycle of threats, attacks, and concessions.

Non-farm payrolls report imminent

The dollar was also supported on Thursday by market uncertainty about the outlook for monetary policy. Investors sold U.S. bonds, pushing up U.S. bond yields. Market focus has shifted to the July non-farm payrolls report to be released on Friday, which is expected to be an important indicator of the Federal Reserve's interest rate direction.

Labor market data released this week has been mixed. U.S. job openings in June increased less than expected and slowed from May. The number of new private-sector jobs added in July by ADP also fell short of market expectations and showed a slower pace of increase than in June.

On the other hand, the number of Americans filing for unemployment benefits for the first time has been below 200,000 for the third consecutive week, a situation that has been quite rare since the late 1960s.

Overall, the data shows that the U.S. labor market remains resilient and supports the Federal Reserve's recent shift in policy focus back to curbing inflation. Meanwhile, Middle East conflicts have caused oil price volatility, changing the inflation trend and causing Federal Reserve officials to diverge on the future direction of monetary policy.

Interactive Brokers senior economist José Torres said, 'I expect July's new jobs to slow for the fourth consecutive month, estimating an increase of only 40,000. The labor market is being affected by supply constraints, with a sharp decline in labor participation rates, a reduction in the labor force, and continued upward pressure on wages.'

He noted, 'Even if the unemployment rate remains low, weak overall new jobs data is enough to drive a U.S. bond rebound. Once fixed-income market investors begin to worry that companies may cut jobs, the market will start to reflect economic slowdown risks.'

But he also said, 'The Middle East situation is still the market's focus, so no matter what the non-farm payrolls report shows, Wall Street is most concerned about the interaction between the U.S. and Iran.'

Apart from the dollar, another major focus in the forex market is the yen.

The dollar rose 0.4% against the yen to 158.39, the first time it has risen above 158 since Japan's authorities last intervened in the forex market.

U.S. Treasury Secretary Scott Bessent confirmed earlier this week that the U.S. had joined Japan in buying the yen, the first time the two countries have jointly intervened in the forex market since 2011 and the first time the U.S. has directly intervened since 1998.

Bessent said in a CNBC interview on Tuesday that the U.S. helped Japan because if the yen continued to weaken, it could impact the entire Asian financial market.

Before this intervention, the yen had fallen to 164 yen to the dollar, a 40-year low.

RSM US economist Joseph Brusuelas said, 'Don't be mistaken, after the intervention, Japan must implement real policy changes, which means policy rates need to be raised to justify the investment of funds.'

As of approximately 6:10 Taiwan time on Friday (July 7):

U.S. Dollar Index: 99.9683, +0.0251%

Euro to U.S. Dollar (EUR/USD): 1 euro to 1.1521 U.S. dollars, -0.0260%

British Pound to U.S. Dollar (GBP/USD): 1 pound to 1.3451 U.S. dollars, -0.0223%

Australian Dollar to U.S. Dollar (AUD/USD): 1 Australian dollar to 0.7030 U.S. dollars, -0.0284%

U.S. Dollar to Canadian Dollar (USD/CAD): 1 U.S. dollar to 1.4015 Canadian dollars, +0.0143%

U.S. Dollar to Japanese Yen (USD/JPY): 1 U.S. dollar to 158.4800 Japanese yen, +0.0252%