Euro firm ahead of ECB decision; $100 oil dampens activity

By Jiaxing Li and Amanda Cooper - Major currencies held steady on Thursday, in the face of another jump in oil prices and global bond yields. The euro traded near two-week highs ahead of a likely rate increase from the European Central Bank (ECB) later in the day. Oil futures remained firmly above $100 a barrel for a second day, as energy flows from the Gulf slowed to a trickle following the biggest wave of attacks on shipping by Iran and the United States since the war began in late February. This has raised concerns about rising prices of refined fuels, such as heating oil and natural gas, just weeks before the European winter.

The ECB is expected to tackle inflation by raising euro zone rates for a second time since the war started in late February. Renewed inflation concerns have sent global bond yields back to multi-decade highs, but have not significantly boosted the dollar as a safe-haven currency. The euro, which hit a two-week high of $1.1654 on Wednesday, was last at $1.1639, up 0.1% on the day. The euro’s sensitivity to oil price swings has weakened due to the prolonged war, which has reduced the dollar’s usual inflows.

Richard Franulovich, head of FX strategy at Westpac Institutional Bank, noted that markets are becoming less sensitive to oil shocks. He also mentioned that debasement trades, global central bank tightening, and a more interventionist U.S. Treasury are drags on the dollar. The Treasury, along with the Bank of Japan, intervened in late July to prop up the yen by selling euros rather than dollars. Treasury Secretary Scott Bessent supports using financial power as a foreign policy tool, and the Treasury announced a larger bond buyback operation to cap higher long-dated yields.

The yen has gained over 6% since late July, trading at 153.525 on Thursday, near seven-month highs. The outlook for the yen will depend on U.S. inflation data, including producer prices on Thursday and consumer inflation on Friday, which could prompt the Federal Reserve to raise U.S. rates during its meeting from September 15 to 16. Traders now price a roughly 60% chance of a Fed rate hike this month after stronger-than-expected nonfarm payrolls data.

Lloyd Chan, senior currency analyst at MUFG, warned that while higher inflation may require tighter policy, additional rate hikes could increase government borrowing costs amid fiscal deficits and debt servicing burdens. A rise in U.S. rates could limit the yen’s potential strength following a Bank of Japan (BOJ) hike. Strategists at JPMorgan believe it is premature to adjust the dollar/yen range to 155 to 165.

Elsewhere, the Chinese yuan traded around 6.705 per dollar in the offshore market, near its highest in nearly four years, after data showed China's producer and consumer price inflation rose due to higher energy costs.

Source: Euronext Markets: Real-time Stock Market Data | live