The U.S. dollar hit its highest in over a month against the euro and yen on Tuesday, buoyed by its safe-haven status on uncertainty about whether the United States will eventually conduct a military strike against Syria.
While U.S. President Barack Obama opted to seek congressional authorization for military action against Syria, a move that was likely to delay any strike for at least several days, geopolitical concerns are keeping investors cautious.
Israel tested a U.S.-backed missile system in the Mediterranean on Tuesday but did not announce the launch in advance, prompting a disclosure by Russia that kept the world on edge as the United States weighed an attack on Syria.
Congress returns from its summer recess on Sept. 9, and any vote to authorize a strike will come after that. While Obama has been pushing Congress to back his plan, passage is by no means certain, easing some concerns over an imminent strike.
The safe-haven yen rose on a media report that Russian radar detected two ballistic 'objects' that were fired towards the eastern Mediterranean. But it gave up those gains after investors realised it was not a missile strike.
"The reaction does speak volumes about the nervousness of the markets as traders await the escalation of conflict with trepidation," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York.
"Although President Obama has stressed the limited aspect of any engagement in Syria, the markets continue to be concerned about any possible fallout from the U.S. military action that could precipitate and the market will therefore remain jittery for the near term."
The dollar regained poise, helped by a rise in U.S. Treasury yields. The interest rate-sensitive 2-year Treasury note yield traded at the highest since July 2011.
Investors are betting the Federal Reserve may start withdrawing stimulus, perhaps as early as this month, especially if the U.S. jobs market shows more signs of improvement.
The U.S. manufacturing sector grew last month at its fastest pace in more than two years, bolstering expectations for faster overall U.S. growth in the second half of the year, an industry report showed on Tuesday.
The Institute for Supply Management (ISM) said its index of national factory activity rose to 55.7 in August from 55.4 the prior month, comfortably beating expectations for 54. It was the highest reading since June 2011.
The euro fell against the dollar, weighed by expectations that the European Central Bank this week will reiterate its pledge to keep interest rates low to support a nascent recovery.
The euro fell to $1.3157, its lowest level since July 22 and was last trading 0.1 percent lower on the day at $1.3180. Its weakness saw the dollar index gain 0.25 percent to 82.281, near its highest level in a month.
"Investors do not want to be long euros heading into the ECB meeting this Thursday," said Geoffrey Yu, currency strategist at UBS. "We haven't heard for a while from (President Mario) Draghi. We expect him to say conditions remain soft despite an improvement in the data and pledge to keep rates low."
The dollar rose as high as 99.70 yen, near its Aug. 2 peak of 99.94 yen, after having gained more than 1 percent on Monday. It was last trading up 0.2 percent at 99.48 yen, recovering from a low of 99.14 yen struck after the reports from the Mediterranean.
