Dollar near one-month low as concerns over oil prices remain subdued

By Stefano Rebaudo

July 16 (Reuters) - The dollar hovered near its one-month low on Thursday as investors weighed subdued U.S. inflation data, which dampened rate-hike expectations, against the risk of a further oil price spike that could support the greenback.

U.S. Treasury yields fell on Wednesday after a second consecutive day of data pointed to moderating inflation pressures, undermining expectations for a Federal Reserve tightening move and support for the greenback.

The U.S. economy is less exposed to energy shocks than many of its peers, helping attract safe-haven flows into the dollar when oil prices rise, often at the expense of the euro and yen. But diplomatic breakthroughs in the Middle East tend to weaken the greenback against both currencies, as lower oil prices improve the outlook for energy-importing economies.

Some investors said the renewed hostilities between the United States and Iran were intended to gain leverage in negotiations aimed at turning an interim deal into a lasting peace, and that the situation could ultimately be de-escalated if or when the U.S. secures a stronger negotiating position.

However, Arend Kapteyn, an economist at UBS, said China's import compression had been crucial and would remain key to stabilising oil markets.

"Chinese import volumes have fallen by 42% since March," Kapteyn said.

"June's data suggest that even as shipping conditions through the Strait improved, before the latest escalation, China showed little urgency to rebuild inventories," she added.

Oil prices turned lower on Thursday as traders took profits while assessing the risks from a new wave of U.S. strikes on Iranian military installations. 

The U.S. dollar index, which tracks the currency against six peers, was little changed at 100.50, hovering near its lowest since June 18. It has fallen 0.8% over the previous two sessions and is on track for a weekly decline.

Chances for a Fed hike in July were cut to 11%, versus a 45% implied probability at the start of the week. Markets still see even odds of at least a 25 basis-point increase in September, according to Fed funds futures prices via CME Group.

ECB RATE PATH IN FOCUS

The euro was little changed at $1.1469. Investors are closely monitoring European gas futures, which have risen to their highest levels since March, stoking concerns that higher energy costs could weigh on the euro zone economy and limit further appreciation of the euro.

The European Central Bank is seen as more hawkish than the Fed, with markets betting on two additional rate hikes into 2027, and some economists not ruling out a first move next week.

"Some ECB officials might actually be inclined to push more forcefully for another rate hike," Carsten Brzeski, global head of macro at ING, said, after mentioning the renewed escalation in the Middle East.

Sterling held near a two-month high at $1.354, little changed after economic data, with investors expecting that Britain's incoming prime minister will pick a fiscally conservative finance minister.

YEN UNDER THE SPOTLIGHT

The yen hovered near multi-decade lows, with attention on potential moves by Japan's Government Pension Investment Fund (GPIF) after Finance Minister Katsunobu Kato said last week the government wants a "substantial" increase in domestic asset investment.

The dollar rose 0.10% to 162. It hit a multi-decade high at 162.84 early this month.

"GPIF’s discussion signals that official-sector capital allocation is becoming an active policy tool rather than a long-term aspiration," Geoff Yu, senior EMEA macro strategist at BNY, said.

"Investors should treat this as the start of a multi-year structural theme, extending well beyond Japan," he added.

Analysts said the GPIF has the greatest capacity among Japanese investors to influence the forex market. GPIF conducts a strategy review every five years and completed its latest one in 2025. However, it can still adjust its holdings within its target allocation bands.

The Australian and New Zealand dollars were both down about 0.1%, at $0.6995 and $0.5842 respectively. 

(Reporting by Stefano Rebaudo; Editing by Christopher Cushing, Alexandra Hudson and Timothy Heritage)