By Chibuike Oguh and Amanda Cooper
NEW YORK, Sept 9 (Reuters) – The dollar traded near a seven-month low against the yen on Wednesday as oil prices settled above $100 a barrel amid an escalating conflict in the Middle East, while investors positioned for central bank meetings next week.
The U.S. currency has come under pressure largely due to the yen’s sharp gains over the past week and shifting expectations ahead of policy decisions from the Federal Reserve and Bank of Japan.
The dollar was down 0.23% at 153.65 yen, not far from Tuesday’s seven-month low of 152.89.
“The main story here is that the U.S. policy premium is putting a cap on the dollar’s advance and we have the yen strengthening with the support of the U.S. Treasury,” said Kevin Ford, FX & Macro strategist at Convera.
“I think there’s a momentary disconnect between rate expectations and oil, which provided support in terms of trade back in March for the U.S. dollar.”
The dollar trimmed losses against major peers after the U.S. Treasury Department said it would triple the size of its long-dated buyback operation on Thursday, purchasing up to $6 billion in bonds.
Against the Swiss franc, the dollar edged up 0.11% to 0.8105 after earlier losses.
The dollar index, which tracks the U.S. currency against six others, was flat at 98.83, nearing its lowest in almost two weeks.
Iranian-backed Houthis in Yemen launched strikes on several Saudi Arabian cities, deepening the involvement of a key U.S. ally in the conflict. American forces also struck multiple Iranian oil tankers, while Tehran hit a U.S. base in Jordan.
Brent crude futures rose 3.36% to settle at $101.21 a barrel – their highest since May, weighing on global markets ahead of U.S. inflation data due on Friday and central bank meetings next week in the U.S. and Japan.
The euro rose 0.05% to $1.1628, nearing a two-week high, ahead of a widely expected rate rise from the European Central Bank on Thursday.
OCBC strategists said the latest Middle East escalation kept Federal Reserve policy implications from higher energy prices in focus, particularly after last week’s strong U.S. payrolls report revived expectations of a rate hike next week.
The yen remained in focus after rising 4% so far this month, challenging the economics of the carry trade, in which investors borrow cheaply in yen to invest in higher-yielding assets elsewhere.
The Japanese currency has strengthened broadly, not only against the dollar but also versus the euro and sterling, as well as against popular carry-trade currencies such as the Mexican peso and Turkish lira.
Gains have been driven by expectations of faster Bank of Japan policy tightening, prospects for repatriation flows from Japanese investors and pressure from Washington for a stronger yen.
Treasury Secretary Scott Bessent dared traders on Tuesday to bet against the yen, following historic joint U.S./Japanese intervention to boost the currency in late July to deter Tokyo from selling U.S. Treasuries to fund the operation.
“These remarks carry significant weight because the secretary had explicitly ruled out intervening in support of the JPY in January. Thinking at the Treasury has evolved,” Scotiabank analysts led by Shaun Osborne said in an investor note.
Markets widely expect the BOJ to raise interest rates by 25 basis points at its September 17 to 18 meeting, though further yen gains may depend on whether Governor Kazuo Ueda reinforces hawkish policy signals.
The Canadian dollar, meanwhile, shrugged off another sideswipe from the United States in the escalating trade conflict between the two neighbouring countries. On Tuesday, the U.S. government banned imports of a broad range of Canadian items, including alcoholic beverages, motorcycles and dairy products.
The Canadian dollar weakened 0.18% versus the greenback to C$1.3808 per dollar.
The Australian dollar strengthened 0.04% versus the greenback to $0.7216.
(Reporting by Chibuike Oguh in New York; Additional reporting by Ankur Banerjee in Singapore; Editing by Sharon Singleton and Deepa Babington)
