FOREX-US dollar hovers near 2026 highs as oil's rise spurs hawkish central bank bets

By Gregor Stuart Hunter

SINGAPORE, March 12 (Reuters) - The dollar extended its gains on Thursday to hold near its strongest levels this year as surging crude prices threatened to spur inflation and force central banks to adopt more hawkish policy stances.

The dollar advanced against the euro, yen, sterling and kiwi for a third straight day as oil prices surged, battering investor confidence.

Surging oil prices will push up energy costs and crimp global growth, economists warn, with risks rising with the duration of the conflict.

"Moves in the currencies have so far tracked countries’ imported energy dependence and the associated terms of trade effects," said Carol Kong, economist and currency strategist at Commonwealth Bank of Australia in Sydney.

"Pricing for ECB policy has lifted much more than the Fed but failed to boost EUR/USD because Europe is at most risk to an energy price shock while the U.S. is energy independent."

Oil market volatility has continued to climb with Iran saying the world should be ready for crude at $200 a barrel as its military attacked merchant ships on Wednesday and vessel traffic through the Strait of Hormuz dwindled to a trickle, sparking a surge in Brent crude futures LCOc1 of more than 10% at one point to highs of $101.59 per barrel.

The euro EUR= slipped 0.2% to $1.1540 in Asian trading, nearing its lowest level since November.

Japan's yen JPY= briefly depreciated past the 159-per-dollar mark, easing as much as 0.2% to 159.23 and approaching its weakest level since July 2024.

The Australian dollar AUD= dropped 0.4% to $0.7122 with the New Zealand dollar NZD= in pursuit, down 0.3% at $0.5897.

The British pound GBP= dwindled 0.3% to $1.3374, a little above its weakest point of the year so far.

CENTRAL BANK RATE TRIGGER GETS CLOSER

U.S. President Donald Trump said on Wednesday that Washington was in "very good shape" in its war on Iran, and the U.S. was "going to look very strongly at the Straits."

However, three sources familiar with the matter said U.S. intelligence indicates that Iran's leadership is still largely intact and is not at risk of collapse any time soon after nearly two weeks of relentless U.S. and Israeli bombardment.

Iran appeared to have set ablaze two tankers in Iraqi waters as it stepped up attacks on oil and transport facilities across the Middle East, raising the number of ships struck in the region since fighting began to at least 16.

"President Trump keeps on saying, even overnight, that the war will end soon - it's unclear to us that it's really up to him," said Rodrigo Catril, a currency strategist at National Australia Bank in Sydney.

"We should expect ongoing volatility in energy prices," he said on a podcast.

"The Strait of Hormuz is not just about oil, it's about LNG, it's about fertilisers," he added. "The longer that there's no ability to go through, the pressure on prices will continue."

Brent crude was up 7.9% at $99.21 in afternoon trading in Asia, even after the International Energy Agency on Wednesday agreed to release a record 400 million barrels of oil from strategic stockpiles to combat the spike in crude prices.

A gauge of oil market volatility from Cboe .OVX, which has risen for seven out of the eight trading sessions since the conflict began, surged on Wednesday to a high of 121.01, shooting to the highest levels since the early days of the COVID pandemic in early 2020.

Risk appetite took a further hit after U.S. President Donald Trump's administration on Wednesday launched a new trade investigation into excess industrial capacity in 16 major trading partners in a move aimed at rebuilding tariff pressure after the U.S. Supreme Court struck down the centrepiece of Trump's tariff programme last month.

"U.S. breakeven inflation and swap spreads are on the march wider," ING analysts wrote in a client note, adding that in the euro zone, the 10-year swap rate is heading for 3%.

Swaps pricing indicates traders expect central banks to tighten monetary policy faster than previously thought. The ECB is now seen hiking as soon as June, while the Reserve Bank of Australia may raise rates at its meeting next week and again in May, according to LSEG data.

Fed funds futures show traders pulling back bets that the Federal Reserve will ease policy until at least September, with an implied 56.1% probability that the U.S. central bank will refrain from a cut at its July meeting, compared to a 43.4% chance a day earlier, according to the CME Group's FedWatch tool.

The U.S. dollar index =USD, which measures the greenback's strength against a basket of six currencies, was flat at 99.442, not far from its highest levels since November.

Against the Chinese yuan CNH=, the U.S. dollar was up 0.1% at 6.8834 yuan in offshore trade, with the greenback steadying after four days of losses.

Bitcoin BTC= fell 1.7% to $69,457.41, while ether ETH= tumbled 2.0% to $2,026.88.