The US dollar continued to weaken as expectations of a Federal Reserve (Fed) interest rate hike receded, while oil prices rebounded on geopolitical tensions in the Middle East.
The latest Israeli attack on Lebanon also added to market uncertainty as investors await developments on the reopening of the Strait of Hormuz.
US Dollar Weakens Again
The US dollar index moved slightly lower and remained near levels last seen in late May.
The weakness came as the market increasingly reduced bets on a Fed rate hike following weaker US economic data.
Earlier disappointing US consumer data also reduced confidence that the Fed will maintain a tighter monetary stance for a longer period.
Oil Prices Scare Again
Crude oil prices moved higher as traders looked for a new catalyst to determine the direction of the energy market.
Brent rose as much as 0.5% to nearly US$89 a barrel before paring some of that gain.
Oil prices have surged nearly 6% in the past week, making geopolitical developments a key factor that continues to weigh on market sentiment.
Israel Strikes Lebanon
Tensions have risen again after Israel launched an attack on southern Lebanon.
Israel said the attack killed 11 people, including a senior Hezbollah commander, making it one of the bloodiest days in months.
The developments have raised concerns that the Middle East conflict could flare up again and put additional pressure on investor sentiment.
Hormuz Remains in Focus
Meanwhile, markets continue to monitor efforts to reopen the Strait of Hormuz.
Any positive developments regarding the strategic route could ease pressure on oil prices, while a failure of talks could maintain risk premiums in energy markets.
Ship movements through the Strait of Hormuz also remain well below pre-conflict levels, suggesting disruptions to global energy routes remain a major risk.
Fed Minutes to Provide Guidance
Investors are also turning to the minutes of the July Fed meeting for a clearer picture of the differences in views among central bankers.
Three Fed officials previously disagreed with the decision to keep interest rates unchanged and opted for a 25-basis-point hike.
The split is notable as the Fed continues to grapple with high inflation and mixed economic data.
Gold Remains Supported
Gold prices also rose around 0.1% to US$4,380 an ounce.
A weaker dollar usually supports gold as the precious metal becomes cheaper for holders of other currencies.
Meanwhile, geopolitical tensions in the Middle East are also keeping demand for safe-haven assets.
US Bonds Also in Focus
The market will also be watching the sale of 20-year US government bonds this week.
The auction will test investors' appetite for long-term US debt after several previous auctions recorded strong results.
Demand for long-term bonds can influence the direction of bond yields and thus affect the dollar and riskier assets.
Impact on the Market
The US dollar's weakness and rising oil prices are now an important combination for the market to watch. Higher oil prices due to Middle East tensions could again increase inflationary pressures, while a weaker dollar reflects reduced expectations for a Fed rate hike.
If the Israeli attack on Lebanon triggers an escalation of regional conflict, gold could continue to receive support as a safe-haven asset, while oil could remain high.
Key Takeaways
The US dollar index moved lower and neared its late-May high.
Brent rose as much as 0.5% to nearly US$89 a barrel.
Oil prices have surged nearly 6% over the past week.
Israel launched an attack in southern Lebanon that killed 11 people.
Markets continue to await developments in the reopening of the Strait of Hormuz.
Gold prices rose around 0.1% to US$4,380 an ounce.
The minutes of the July Fed meeting will be in focus to gauge divergences in interest rates.
The US 20-year Treasury bond auction will also be in focus this week.
While the US dollar is under pressure from the Fed’s rate hike expectations, oil prices have rebounded as geopolitical risks in the Middle East gain traction.
Investors are expected to continue to monitor developments in Israel-Lebanon, the Strait of Hormuz negotiations and the Fed meeting minutes as these three factors could determine the direction of oil, gold, the dollar and US bond yields in the near term.
