By Ankur Banerjee
SINGAPORE, June 11 (Reuters) - The U.S. dollar wobbled on Thursday as new U.S. strikes in the Middle East undermined sentiment, while a surge in May U.S. consumer inflation to a three-year high kept investors uneasy about the Federal Reserve's monetary policy outlook.
The currency markets have been subdued this week, as investors weighed the fragile ceasefire in the Middle East against a renewed cycle of tit-for-tat strikes between the U.S. and Iran, eroding hopes for a near-term
peace agreement.
The euro bought $1.1553, inching away from the 10-week low it hit last week, but has given up most of its gains since a ceasefire was struck in early April. The spotlight will be on the European Central Bank policy meeting later in the day as it looks poised to raise rates to tackle inflation.
Sterling was at $1.33905. The dollar index, which measures the U.S. currency against six major peers, eased to 99.903 after U.S. military said it has completed strikes against multiple targets in Iran.
The United States began a fresh round of strikes overnight in Iran, the U.S. military said, as President Donald Trump vowed even more attacks if no peace deal is secured.
The latest escalation kept markets jittery, pushing oil prices higher. Brent futures rose over 2% to $95.40 a barrel. [O/R]
Still, the market reaction was less volatile than in the past, with the dollar remaining relatively subdued in early Asian trading.
"We still have a bit of news fatigue in the market, this kind of escalation a few weeks ago would probably have had Brent back up through $100 a barrel and the dollar surging," said Nick Twidale, chief market analyst at ATFX Global.
"It comes down to the markets craving a bit of certainty again," said Twidale. "Is this conflict and closure of the Strait going to be the new status quo ... or another 'negotiating tactic' that brings peace hopes back to the table."
RATE HIKE JITTERS
While the U.S. Consumer Price Index increased 4.2% in the 12 months through May, the largest gain since April 2023, economists remain of the view that the bar is high for monetary policy tightening.
The so-called core CPI gained 0.2% over the month after rising 0.4% in April, bolstering hopes that the price pressures from the energy shock might be contained.
James Knightley, chief international economist at ING, said labour remains the largest cost for corporate America, and with wage growth continuing to cool, that should help ease some of the pressure on core inflation.
"This should all help to keep inflation expectations in check, so while we no longer expect the Fed to cut interest rates this year given improved economic momentum, we don’t expect a rate hike either," Knightley said.
Traders have fully priced in a 25-basis-point hike in December, a sharp turn from expectations of two rate cuts this year before the Iran war erupted at the end of February.
The Japanese yen was at 160.52 per dollar, leaving traders on edge about the possibility of official intervention from Tokyo.
Bank of Japan Governor Kazuo Ueda has been hospitalised for medical treatment and will miss the June 15 to 16 policy meeting, where the central bank is widely expected to raise interest rates.
"We do not expect Ueda’s absence to impact on the BOJ's policy decision," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "We and the market continue to expect a 25bp rate hike next week."
In other currencies, the Australian dollar was at $0.7006 after touching a nine-week low earlier in the session. The New Zealand dollar was steady at $0.5797. [AUD/]
(Reporting by Ankur Banerjee in SingaporeEditing by Shri Navaratnam)
