HONG KONG – The U.S. dollar held near a one-week high on Wednesday as renewed uncertainty in the Middle East weighed on markets, and investors digested hotter-than-expected U.S. inflation data while keeping a close eye on the Japanese yen.

The euro slipped 0.26% to $1.17095, while sterling traded 0.1% lower at $1.3524. Risk-sensitive currencies like the Australian dollar remained steady at $0.72410, and the New Zealand dollar fell 0.3% to $0.59345.

The U.S. dollar index, which tracks the greenback against six major currencies, rose 0.2% to 98.501, marking its highest level since May 5.

Meanwhile, oil prices dipped 1% but stayed above the $100 mark, with Brent crude last trading at $106.60 per barrel.

Hopes for a peace deal in the Middle East have faded after former President Donald Trump said a ceasefire with Iran was “on life support,” following Tehran’s rejection of a U.S. proposal to end the conflict. Trump also stated he does not expect to need China’s help to resolve the war ahead of his meeting with President Xi Jinping later this week.

“What's going on in the Strait of Hormuz… that’s the main driver in the background,” said Tommy von Brömsen, FX strategist at Handelsbanken in Stockholm. “The longer this goes on, the more central banks will face difficult decisions.”

U.S. Inflation Surges

The U.S. consumer price index (CPI) rose 3.8% in the 12 months through April, the biggest year-on-year increase since May 2023. Rising oil prices due to the conflict contributed significantly to the inflation spike.

Yields on the U.S. two-year note and 10-year Treasury hovered near seven-week highs, at 3.9812% and 4.461%, respectively. Markets have largely discounted any chance of a Federal Reserve rate cut this year, while expectations for a 25-basis-point hike at the Fed’s December meeting rose to 35%, according to CME’s FedWatch Tool.

Commerzbank FX analysts said the CPI jump was both surprising and significant, especially as Fed Chair Jerome Powell’s term nears its end. The U.S. Senate recently confirmed Kevin Warsh to a 14-year term as Federal Reserve governor, positioning him as Powell’s likely successor.

“The key question in the coming months will be whether Warsh can build enough support within the FOMC to push for early rate cuts,” Commerzbank analysts said.

Yen in Focus

The Japanese yen fell 0.1% to 157.77 per dollar, after a sharp move higher on Tuesday fueled speculation of a “rate check” by authorities—a common precursor to currency intervention.

U.S. Treasury Secretary Scott Bessent said on Tuesday that both the U.S. and Japan agree that excessive currency market volatility is undesirable, offering some backing to Tokyo’s recent intervention efforts.

“My concern is that intervention alone may not be enough to strengthen the yen at this point,” said Idanna Appio, portfolio manager at First Eagle Investments.

On Wednesday, the Bank of Japan clarified that Bessent did not meet with BOJ Governor Kazuo Ueda during his visit to Tokyo.

China’s yuan traded around 6.79 per dollar, near its strongest level since February 2023, ahead of Trump’s trip to Beijing.

-Reporting by Jiaxing Li in Hong Kong and Lucy Raitano in London; additional reporting by Elizabeth Howcroft in Paris and Dhara Ranasinghe in London; Editing by John Mair and Thomas Derpinghaus/Reuters