Dollar mostly flat amid escalating US-Iran tension, yen slides on pension doubts

NEW YORK/LONDON, July 13 : The dollar was barely higher on Monday as hostilities in the Gulf escalated ahead of the monthly U.S. inflation report, while the yen slid following a Reuters report that Japan had no immediate plan to change state pension funds' asset allocations.

President Donald Trump said on Monday the U.S. was reinstating a naval blockade on Iran. Trump said the process would begin immediately, without elaborating.

The dollar index, which tracks the currency against six peers, was last up 0.04 per cent at 101.11. The U.S. currency rose earlier in the session along with oil prices but later lost ground. The euro was off 0.1 per cent at $1.1402 and sterling was down 0.24 per cent to $1.3370, while the Australian dollar weakened 0.27 per cent to $0.6931.

U.S. and Iranian forces exchanged heavy missile and drone assaults at the weekend, with Tehran targeting U.S. facilities in states across the Gulf on Sunday and saying it had again closed the vital Strait of Hormuz shipping route.

Oil prices rose, with Brent crude futures up 4.39 per cent at $79.32 a barrel.

INFLATION IN FOCUS

Inflation risks are likely to remain in focus with the release of U.S. CPI data on Tuesday, PPI gauges the following day, and Fed Chair Kevin Warsh's testimony before the House and Senate, Westpac analysts wrote in a research report.

"Investors are balancing renewed geopolitical uncertainty against a reluctance to take on meaningful risk ahead of two major catalysts on Tuesday: the latest U.S. inflation report and Fed Chair testimony," said Joel Kruger, market strategist at LMAX Group in London.

"Those events should provide much clearer direction for markets and are likely to trigger a pickup in volatility after today's cautious trade."

Fed funds futures are pricing in about 30 basis points of rate hikes by the U.S. central bank this year, according to LSEG data.

"I think the bar to a July rate decision by the Fed is very high," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York. "Just given the volatility of the events in the Middle East, I think that the market doesn't have much conviction here, and that's leaving the currencies mostly sideways."

YEN SLIDES AGAIN

The Japanese yen slipped against the dollar on Monday after Reuters reported that Tokyo had no imminent plans to change the asset allocations of its state pension funds.

The dollar was last up 0.42 per cent at 162.37 yen, putting traders back on alert for possible intervention from authorities in Tokyo as the Japanese currency continues to languish at 40-year lows.

The yen and Japanese bonds had rallied on Friday after Finance Minister Satsuki Katayama said the government would seek ways to encourage pension funds, including the Government Pension Investment Fund, to make greater investments in Japanese financial assets.

While the government is exploring ways to boost such investments within the existing allowable ranges of the benchmark portfolio, the initiative will not lead to immediate revisions to GPIF's medium-term objectives, two government sources told Reuters.

"I think it's a half-hearted attempt," said Marvin Loh, senior global market strategist, State Street in Boston. "Unless they really follow through and quite frankly, unless they're willing to raise rates, I think we wind up being around these levels."