Dollar rises as Iran deal doubts cloud outlook

NEW YORK: The dollar rose to a six-week high on Thursday (May 21) after Iran’s Supreme Leader issued a directive that the country’s near-weapons-grade uranium must not be sent abroad, hardening Tehran’s stance and casting doubt on how close a deal is to end the Middle East war. That dampened the optimism sparked on Wednesday, when US President Donald Trump said negotiations with Iran were in the final stages.

Prolonged energy disruptions as the war drags on threaten to feed through to core US consumer prices and inflation expectations, potentially pushing the Federal Reserve toward rate hikes.

A stronger US growth outlook adds further weight to the case for tightening, even as other economies face a weaker trajectory and greater exposure to elevated energy costs.

“We’re almost three months from the start of the oil shock and typically that’s when global growth starts to see a bit of a deterioration, so we’re a bit hesitant on global growth exposed currencies,” said Noah Buffam, director in FICC strategy at CIBC Capital Markets in Toronto.

Weak PMIs on Thursday underscored that unease, boosting the dollar on the back of its comparatively stronger outlook.

“A lot of them came in below expectations,” said Buffam. “Going forward we might see a little bit more growth weakness.” Economic activity in the euro zone shrank at its sharpest rate in more than 2-1/2 years in May, as a war-driven surge in living costs hammered demand for services and firms accelerated layoffs.

Even so, “there is nothing here to put the European Central Bank Governing Council off its plans to raise rates by 25 bps in June, nor anything to ease concerns about the risks of a recession,” said Andrew Kenningham, chief Europe economist at Capital Economics. Elsewhere, British companies are suffering their most widespread drop in activity in over a year, while Japan’s manufacturing sector slowed slightly in May and service sector growth ground to a halt for the first time in over a year.