Dollar rises in choppy trading as investors weigh inflation prospects

By Chuck Mikolajczak

NEW YORK, Sept 22 (Reuters) - The dollar rose in uneven trading on Tuesday, oscillating between gains and losses after hitting a two-month high earlier in the day as volatile oil prices clouded the inflation picture. 

Oil prices settled down about 1%, pulling back from earlier highs, after US President Donald Trump told reporters at the United Nations that US officials had had a "very good" three-hour meeting on Tuesday with the Iranian delegation.

Crude prices earlier fell to a two-week low following Iran's proposal to reopen the Strait of Hormuz within seven days if the US eases military pressure and after Iran and the United States hinted at the prospect of reviving negotiations to end their conflict.

But the early optimism was dented after Trump said during a speech to the United Nations General Assembly that he thought the US would reach a deal with Iran after the midterm elections are held in early November, which pushed oil and the dollar higher.  

"Obviously, the big bogeyman for everybody is inflation, but it's all been about why is there so much inflation?" said Juan Perez, senior director of trading at Monex USA in Washington.  "It's all due to the Iranian conflict going on so long, the escalation. So this is where markets are right now, and this is why you're seeing the dollar not really have any clear direction."

DOLLAR INDEX HITS TWO-MONTH HIGH

The dollar index, which measures the greenback against a basket of currencies, rose 0.17% to 100.59, with the euro down 0.18% at $1.1441. The dollar index had risen as much as 0.29% on the day to 100.70, its highest since July 30, while also falling as much as 0.11%. 

The ongoing US-Israeli war on Iran had sent oil prices higher and fanned inflation worries, prompting rate hikes from several central banks in recent days, including the Federal Reserve, but recent optimism over a potential deal has pushed oil prices back below the $100 per barrel mark. 

Comments from Fed officials in the wake of its policy decision have also flagged the possibility of more rate increases if inflation does not cool.    

Federal Reserve Bank of Boston President Susan Collins wrote on Tuesday in a LinkedIn post that she supported last week’s central bank interest rate increase amid the risks that future inflation will be above its 2% target.

Separately, Richmond Fed President Tom Barkin said economic conditions in the US may be firming, and inflation pressures are coming from more than just higher energy costs and tariff effects. 

Analysts at Morgan Stanley said in a note that options pricing data in the week ending September 18 indicated that investors increased long positions in the dollar index and increased short positions in the euro. 

Markets are roughly split on whether the Fed will raise rates at its October meeting, pricing in a 55.4% chance for a hike of at least 25 basis points, down from 57.6% in the prior session, according to CME FedWatch. 

JAPANESE CURRENCY UNDER PRESSURE

Against the Japanese yen, the dollar strengthened 0.03% to 157.41 and was on pace for its third straight daily gain.

Traders were also weighing whether the Bank of Japan would raise rates quickly enough to narrow the gap with its global peers.

Despite the BOJ's rate hike last week, the Japanese currency has been under pressure. Investors view the dissent from two policymakers, who pushed for a more cautious pace, as a warning that additional hikes may be harder to implement.

Sterling weakened 0.23% to $1.3332 and was on track for a second straight daily decline, and sixth in the past seven.

(Reporting by Chuck Mikolajczak, additional reporting by Niket Nishant in Bengaluru and Tom Westbrook in Singapore; Editing by Kim Coghill, Barbara Lewis, Ros Russell and Andrea Ricci)