The situation in Iran continues to trigger market tension, with Asian currency markets remaining calm; the Australian dollar surges due to rising expectations of interest rate hikes.

Investing.com - On Wednesday, most Asian currencies remained within narrow ranges as mixed signals from the US and Israel regarding the Iran war, along with market caution ahead of key US inflation data, led traders to stay on the sidelines.

The Australian dollar performed strongly, soaring to a nearly four-year high as markets increasingly believe the Reserve Bank of Australia will raise interest rates next week.

The yen lagged behind, with soft producer inflation data raising doubts about the likelihood of a near-term rate hike by the Bank of Japan.

The US dollar index and dollar futures edged lower during Asian trading hours as the dollar stalled while awaiting more clues from the US economy. Consumer Price Index (CPI) inflation data for February will be released later Wednesday evening, though it is unlikely to reflect the impact of the Iran war on energy markets.

Although the dollar initially rose with the outbreak of the Iran conflict, it has stalled this week amid conflicting signals about when the war might end.

Australian dollar hits nearly four-year high on expectations of RBA rate hike

The Australian dollar was the best-performing currency in Asia, with the AUD/USD pair rising up to 0.7% to $0.7175, the strongest level since mid-2022.

The currency was buoyed by growing market expectations that the RBA could hike rates as soon as next week, especially amid increasing uncertainty about energy-driven inflation sparked by the Iran conflict.

RBA Deputy Governor Andrew Hauser said on Tuesday that whether the bank hikes rates at its meeting next week will be a “genuine” debate.

Westpac analysts expect the RBA to raise rates by 25 basis points in March and again in May, citing inflation risks from the Iran crisis.

Westpac Chief Economist Luci Ellis wrote in a report: “Rising oil prices have a significant but temporary impact on overall inflation. Nevertheless, the RBA’s monetary policy committee will likely feel the need to respond, especially given that the hit to confidence and financial markets so far has not been severe.”

Ellis added that the temporary energy shock still leaves open the possibility of holding steady next week.

Asian currency markets mixed amid conflicting signals from Iran conflict

Most broader Asian currencies underperformed, remaining within narrow ranges as markets interpret mixed signals from the Iran war.

The USD/JPY pair rose 0.1%, returning above 158 yen after February’s producer price index inflation data came in below expectations. At the time of the data release, markets widely expected CPI inflation to decline, fueling further doubts about the Bank of Japan’s ability to hike rates soon.

The yen received brief support from upward revisions to Q4 GDP growth data.

The USD/SGD pair declined 0.1%, while the USD/KRW fell 0.3%, reversing gains made earlier this week.

The USD/CNY pair declined 0.1%, after China’s PBOC set a strong midpoint rate again, while the USD/INR remained flat above 92 rupees.

Asian markets were impacted by turmoil in energy markets, as Iran began blocking the Strait of Hormuz in response to attacks by the US and Israel. Tehran stated it would continue attacking ships in the strait until hostilities against the Islamic Republic cease.

US President Donald Trump claimed this week that the war is nearing its end. However, Iran rejected this, saying Tehran will decide when the conflict ends.

The Strait of Hormuz is a critical oil and natural gas shipping route in Asia, and prolonged disruptions are expected to have serious consequences for economies heavily dependent on energy imports.

Japan, South Korea, Singapore, and India are seen as most vulnerable to energy market disruptions, while China is considered better positioned to withstand recent supply shocks.

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