FOREX: Dollar rises, as investors remain on edge about Middle East risks

The dollar strengthened against the euro and the yen on Wednesday as investors remain on edge over further escalation in the Middle East conflict that has driven up energy prices worldwide as Iran struck tankers and energy storage facilities in fresh attacks.

The dollar has risen about 2% against the euro since February-end on a flight to safe-havens - was 0.4% higher against the euro on Wednesday. Those gains eased earlier in the week on brief hopes that the conflict, which started nearly two weeks ago when the U.S. and Israel struck Iran, would be resolved.

Iran's military command said on Wednesday the world should be prepared for oil to hit $200 a barrel, as three more ships came under attack in the blockaded Gulf.

Oil prices gained more than 4% on Wednesday as fresh attacks on ships in the Strait of Hormuz worsened supply disruption fears, and analysts said the International Energy Agency's proposal for a record release of 400 million barrels of oil reserves is inadequate to ease those fears.

"The war in Iran and the impact on energy prices is still the predominant focus for FX," Kyle Chapman, FX markets analyst at Ballinger Group in London, said.

"Optimism around a near-term end to the war appears to be fading again as Iran is striking vessels and attempting to mine the Strait of Hormuz."

The U.S. military "eliminated" 16 Iranian mine-laying vessels near the key shipping artery of the Strait of Hormuz on Tuesday, the U.S. Central Command said in a statement, as President Donald Trump warned that any mines laid in the strait by Iran must be removed immediately.

Against the yen, the dollar was 0.5% higher at 158.90 yen.

INFLATION CHECK

U.S. consumer prices rose moderately in February, according to data released Wednesday, as rents maintained a steady pace of increases, though households paid more for gasoline and at the supermarket.

However, in light of the surge in energy prices, traders were looking past that data to concerns about inflation in coming months.

"(The report) is not relevant at the moment ... the current price action, the move in rates we've had recently is much more of a forward-looking story," said Shahab Jalinoos, head of G10 FX research at UBS.

"What would happen if energy prices globally stay elevated? What would be the spillover effects from that, how would that feed through into core CPI as well as headline CPI? These are the questions the market is thinking about," Jalinoos said.

A jump in inflation in coming months would make it hard for the Federal Reserve to cut rates further, investors said.

"While today's inflation numbers give the market some relief, we could very well be facing some nasty inflation prints in the months to come which the Fed may, or may not, be able to look through," John Kerschner, global head of securitized products and portfolio manager at Janus Henderson Investors, said in a note.

The Australian dollar was up 0.4% on the day at $0.7149, supported by growing expectations for the Reserve Bank of Australia to hike rates next week.

The risk-sensitive currency faring well, even as market volatility spiked and positioning has been crowded, was notable, Jalinoos said.

The British pound was about flat on the day at $1.3414 in a choppy session driven by fears of an oil supply shock. Oxford Economics estimated that UK inflation could be 0.4 percentage points higher if shipping through Hormuz was disrupted for up to two months.

Leading cryptocurrency bitcoin BTC= rose 1% to $70,794 but remained close to the multi-year low touched in early February.

-Saqib Iqbal Ahmed/Reuters