Dollar firms on Gulf tensions as ASEAN markets eye US inflation data

The greenback edged higher on Wednesday, buoyed by renewed tensions in the Gulf region, as markets across Southeast Asia and beyond turned their attention to upcoming U.S. inflation data for clues on the Federal Reserve's next policy move. For ASEAN economies heavily reliant on energy imports, the geopolitical risk premium on oil prices is a familiar concern, one that could ripple through regional currencies and trade balances.

Why the dollar is gaining despite soft jobs data

Investors have been buying the safe-haven dollar as concerns mount over the economic impact of a potential energy shock from the Iran situation. The United States and Yemen's Iran-aligned Houthis reported separate attacks on shipping on Tuesday, while Tehran stated that the Strait of Hormuz would remain closed unless Washington accepts its conditions. Oil prices edged up in response.

Analysts noted that Friday's soft U.S. jobs data did not weigh heavily on the greenback. The market expects inflation to drive the next Fed rate move. Fed Bank of Chicago President Austan Goolsbee reinforced this view on Tuesday, saying he was more concerned about too-high inflation than labor market weakness.

U.S. inflation data: the key signal for Fed policy

Economists expect data due later in the session to show inflation picked up last month after easing in June, when oil prices fell on hopes of an Iran peace deal. A strong reading, particularly in core services or shelter, could reverse the recent repricing and result in a sharp bid for the dollar, given how aggressively rate hike odds have fallen, according to Wee Khoon Chong, macro strategist at BNY.

Conversely, a soft print or one in line with expectations would reinforce current institutional positioning, keeping USD scored holdings low and encouraging continued outflows, he added. Fed funds futures imply a 50 per cent chance the central bank will leave rates unchanged at its meeting ending September 16, according to the CME Group's FedWatch tool. The U.S. dollar index was up 0.05 per cent at 99.85.

Gas prices and the euro: a key dynamic for ASEAN trade

The single currency was down 0.05 per cent at $1.1536, having hit $1.1580 on Monday, its highest in almost two months. Strong euro zone economic figures have struggled to support the euro recently as investors assess the impact of higher natural gas prices above €60. Gas prices have a greater influence on euro zone inflation than oil because of their central role in heating, power generation and industry, making them a key focus for the European Central Bank. For ASEAN economies that trade heavily with Europe, this dynamic could affect export competitiveness and inflation trends.

Yen and BoJ: a potential rate divergence

U.S. Treasury yields and the continued removal of Fed tightening bets will be crucial to support the yen. A September rate hike from the Bank of Japan would underscore the intention to press ahead with policy normalisation. Market pricing points in the same direction, with higher Japanese government bond yields signalling increasing expectations of a BoJ rate hike next month.

The yen was 0.05 per cent weaker against the dollar at 159.38, reaching its softest levels of the month despite recent joint intervention by U.S. and Japanese authorities to strengthen the Japanese currency. Lee Hardman, senior currency economist at MUFG, noted that the latest CFTC report showed the intervention triggered a sharp squeeze of speculative short yen positions. If fundamentals do not change, speculators may be encouraged to rebuild short yen positions at a time when stable financial market conditions remain supportive for carry trades.

Sterling and kiwi dollar: regional implications

The British pound was roughly unchanged within striking distance of its one-month high. The New Zealand dollar was 0.36 per cent weaker at $0.5860 after Prime Minister Christopher Luxon said on Wednesday he had won a confidence vote of ruling party lawmakers, following speculation about his leadership months from a general election. For ASEAN investors, these currency movements highlight the interconnected nature of global markets and the importance of monitoring geopolitical and monetary policy developments.

FAQ: Key questions for ASEAN markets

How do Gulf tensions affect ASEAN currencies?

Gulf tensions typically push oil prices higher, which can increase import costs for ASEAN economies and pressure their currencies. The dollar often strengthens as a safe haven, making regional currencies weaker in comparison.

What does U.S. inflation data mean for ASEAN?

Higher U.S. inflation could prompt the Fed to keep rates higher for longer, which may strengthen the dollar and increase borrowing costs for ASEAN economies. Lower inflation could ease these pressures and support regional growth.

Why are Japanese yen movements important for Southeast Asia?

The yen is a key currency for trade and investment flows in the region. A weaker yen can affect export competitiveness for ASEAN countries and influence capital flows, especially given Japan's role as a major investor in the region.