Dollar Rises as Gulf Tensions Escalate Ahead of US Inflation Data

The US dollar experienced a slight increase on Wednesday, driven by renewed tensions in the Gulf region and investors' concerns about the economic impact of an energy shock from the Iran war.

Oil prices edged up after the United States and Yemen's Iran-aligned Houthis reported separate attacks on shipping on Tuesday, with Tehran saying the Strait of Hormuz would remain closed unless Washington accepts its conditions.

Austan Goolsbee, President of the Federal Reserve Bank of Chicago, supported the view that inflation is a more pressing concern than labor market weakness. 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.

Wee Khoon Chong, macro strategist at BNY, noted that a strong showing in inflation data would likely lead to a sharp increase in USD holdings and interest rate hike odds. Conversely, a soft print or one that is in line with expectations would reinforce the current institutional positioning bias, keeping USD scored holdings low.