Dollar Rises on Geopolitical Risks, USD/JPY Rebounds

The US Dollar posted its best daily performance in two weeks, thanks to heightened geopolitical risks and investors closing out positions ahead of key US labour market data. The jobs report is expected to show an increase of 80K in employment, with the unemployment rate remaining at 4.2%. However, this news is unlikely to alter the prospects of a rate hike in September, as the Federal Reserve prioritizes fighting inflation.

Brent oil prices have surged above $80 per barrel, driven by doubts over the durability of the deal between Iran and Oman to reopen the Strait of Hormuz. Hardline figures in Tehran are demanding the removal of US and Israeli ships, as well as the lifting of sanctions and transit fees from unfriendly countries.

The strengthening of the greenback against major global currencies has helped USD/JPY bulls recoup half of their losses due to the coordinated currency intervention. However, speculators are being aided by the wide spread between the Federal Reserve's and the Bank of Japan's interest rates, which is fuelling appetite for carry trades.

Hedge funds remain unfazed by high-profile statements from officials in Washington and Tokyo regarding further intervention if necessary. The forward market puts the odds of a monetary policy tightening by September at 60%, but the Bank of Japan will need to take decisive action to consolidate USD/JPY at current levels.