Dollar gains as Middle East tensions escalateInflation concerns intensify, Fed hike bets move forwardDollar/yen tests 160 and pulls back amid intervention warningsWall Street hits record highs, gold falls back below $4,500Attacks in the Middle East ResumeThe dollar traded mixed against its major counterparts yesterday as Middle East uncertainty remains elevated, while it gained strength today following new hostilities in the region.Iran reiterated that they have withdrawn from negotiating with the US, also stopping any exchange of messages, though President Trump insisted that the dialogue was ongoing. What’s more, despite headlines pointing to an Israel-Hezbollah ceasefire, Israel continued striking southern Lebanon, while Kuwait reported that they have intercepted Iranian missiles and drones after US forces launched attacks on Iran’s Qeshm Island, which lies near the Strait of Hormuz.Hopes about full reopening of the strait have been dashed, evident by the rebound in oil prices, which heightened concerns about further inflationary pressures. Indeed, Treasury yields moved higher, while Fed rate hike bets were brought forward. According to Fed funds futures, investors are now fully penciling in a 25bps rate hike in January, while the probability of it being delivered by December has risen to 80%.US Data In Focus Amid Fed Rate Hike SpeculationToday, besides headlines surrounding the Middle East, investors are likely to pay attention to the ADP private employment report and the ISM services PMI for May. Following the better-than-expected ISM manufacturing PMI on Monday and yesterday’s JOLTS job openings, solid employment gains in the private sector and a thriving non-manufacturing sector, which accounts for roughly 90% of US GDP, could encourage investors to bring the Fed hike timing even closer, especially if the ISM prices subindex points to accelerating inflation.Dollar/Yen Touches Psychological Barrier of 160Yen traders continued to test the nerves of Japanese authorities, pushing dollar/yen to test the 160.00 barrier, even after Finance Minister Katayama said that they stand ready to respond appropriately to excessive currency moves.The pair pulled back immediately after touching the psychological mark of 160.00, losing around 40 pips, but there were no headlines commenting on whether this was a mini-intervention episode or even a rate check. In any case, for any action to have the desired outcome, the BoJ may have to embark on a series of rate hikes. Otherwise, yen selling could resume.According to Japan’s Overnight Index Swap (OIS) market, there is a 75% chance of a rate hike at the upcoming meeting on June 16. Nonetheless, a rate hike on its own is unlikely to encourage a strong yen buying spree. Officials may need to communicate willingness to continue raising borrowing costs.US Stocks Hit Fresh Record Highs, Gold Pressured By Hike BetsWall Street once again remained unfazed by Middle East headlines, with all three of its main indices hitting fresh record highs yesterday. That said, the Dow Jones was the main gainer, while the tech-heavy Nasdaq closed virtually unchanged, which suggests a rotation away from large-cap growth stocks toward more cyclical and value-oriented sectors.This corroborates the notion that momentum in chipmakers could be cooling after May’s strong rally and that, at some point, investors may consider taking some profit before joining again later at more attractive levels.Gold pulled back, returning below the $4,500 mark, as traders felt that the Fed should consider raising interest rates sooner. The metal continues to trade in a trendless manner, and traders may be eager to find out whether data bolstering hike bets will result in another test near the 200-day moving average.