Dollar Erases Post-CPI Losses as Strait of Hormuz Tensions Boost Safe-Haven Demand

The U.S. dollar rose slightly on Wednesday (12th), recovering from earlier lows as uncertainty over a potential Middle East peace deal offset the impact of July's consumer inflation data, which came in line with expectations. The latest inflation figures have further reduced market expectations for a Federal Reserve (Fed) rate hike.

Recent investor optimism about tighter monetary policy had driven the dollar higher, but the latest CPI report did not contain any surprises large enough to sustain that rally.

In late New York trading, the dollar index (DXY), which tracks the greenback against six major currencies, rose 0.2% to 99.98. After the CPI release, the index initially widened its decline, hitting an intraday low of 99.61, before rebounding and turning positive ahead of noon.

Market participants focused on Wednesday’s release of the July Consumer Price Index (CPI) report for clues on future monetary policy direction. Last Friday’s weaker-than-expected jobs report had already prompted markets to rapidly reassess the likelihood of a Fed rate hike in September.

According to data from the U.S. Bureau of Labor Statistics, overall CPI rose 0.1% month-on-month in July, compared to a 0.4% drop in June. Year-on-year inflation slowed from 3.5% to 3.4%. Core CPI, which excludes food and energy prices, rose 0.2% month-on-month in July, following a flat reading in June. On a year-over-year basis, core inflation eased from 2.6% to 2.5%. All four readings matched market expectations.

Thursday will bring the release of the July Producer Price Index (PPI). While both CPI and PPI are widely watched inflation indicators, the Fed prefers the Personal Consumption Expenditures (PCE) price index to assess inflation trends. Components of CPI and PPI are included in the calculation of PCE.

For the Federal Open Market Committee (FOMC), these in-line data may provide more room to keep rates unchanged rather than hiking, especially following last week’s weak employment report.

Interest rate markets reflect this shift. According to the CME FedWatch tool, the probability of no rate change in September rose from 54% to 62% after the CPI release.

Turning to the Middle East, oil prices were volatile on Wednesday as markets reacted to conflicting statements regarding the Strait of Hormuz. Brent crude futures briefly touched $90 per barrel.

Progress toward a peace agreement to reopen this critical waterway appears limited, with both the U.S. and Iran continuing to claim control over the strategic channel.

Former U.S. President Donald Trump posted on Truth Social: "The United States has full control of the Strait of Hormuz."

Iranian state media reported earlier Tuesday that Iran had renewed its demands, stating that the U.S. must cease hostile actions across all fronts and unfreeze seized assets before the Strait of Hormuz would be reopened. The remarks were attributed to Mohsen Rezaei, head of Iran’s Supreme National Security Council, speaking to China’s ambassador in Tehran.

According to Iranian state media, Rezaei said, "The Strait of Hormuz will not open until the U.S. changes its behavior and accepts Iran’s conditions. Any shipping agreement between Iran and Oman is separate from the closure of the Strait of Hormuz."

Data from Kpler showed a slight increase in the number of vessels confirmed transiting the Strait of Hormuz on Tuesday, but overall market sentiment remained cautious, with new attacks further fueling concerns.

Houthi rebels in Yemen attacked commercial shipping in the Bab el-Mandeb Strait, killing four cargo ship crew members and two Yemeni rescue personnel.

Elsewhere among major currencies, the Japanese yen weakened against the dollar, continuing to give back gains made after the end-of-July historic joint intervention by Washington and Tokyo. USD/JPY rose 0.1% to 159.46.

Earlier released Reuters Tankan survey data showed improved Japanese business confidence in August, driven by strong semiconductor demand and robust domestic consumption. The survey aims to preview results from the Bank of Japan’s quarterly Tankan survey.

The euro fell 0.2% against the dollar to 1.1524.

Sterling dropped 0.1% to 1.3491.

As of approximately 5:40 a.m. Taiwan time Thursday (13th):

DXY at 99.9828 (+0.0107%)

EUR/USD at 1.1520 (-0.0347%)

GBP/USD at 1.3490 (-0.0445%)

AUD/USD at 0.7058 (-0.0708%)

USD/CAD at 1.3938 (-0.0072%)

USD/JPY at 159.2500 (-0.0188%)