TLDR
- The Dollar Index rose 0.55% to 99.55, nearing a two-week peak on Monday
- Markets are pricing in an 86% chance the Fed hikes rates by 25 basis points this week
- The euro dropped 0.5% to $1.1500 after last week’s ECB rate hike to 2.50%
- Brent crude jumped 3% to near $112 a barrel following strikes on Saudi pipeline infrastructure
- Bank of America expects the dollar to trade sideways into year-end despite rate hike bets
The dollar pushed higher Monday as traders priced in a near-certain Federal Reserve interest rate hike this week, driven by sticky inflation data and a fresh jump in oil prices.
The Dollar Index, which tracks the greenback against six major currencies, climbed 0.55% to 99.55. That snapped two straight weeks of modest losses.
Markets now put the odds of a 25 basis point rate hike at the Fed’s September 15-16 meeting at 86%, according to CME FedWatch data.
Inflation Data Fuels Rate Hike Expectations
Friday’s consumer price index report kept pressure on the Fed. Headline inflation held at 3.4%, and core month-on-month CPI ticked up to 0.3%.
That brief push sent the 10-year Treasury yield past 5%. Swaps traders are also building in strong odds of a follow-up hike in December.
The euro fell 0.5% to $1.1500, a near two-week low. Traders are weighing euro area stagflation risks against the stronger dollar, following the European Central Bank’s rate hike to 2.50% last week.
The Japanese yen pulled back slightly Monday, with the dollar rising 0.65% against it to around 154.55. Still, the yen holds a 4% gain for September, sitting near seven-month highs touched last week.
The Bank of Japan is widely expected to raise its policy rate by 25 basis points on Friday, bringing it to 1.25%. Expectations of faster tightening, along with Tokyo’s record $96.4 billion currency intervention, have pushed speculators to go net long on the yen for the first time since February.
Oil Spike Adds to Currency Market Pressure
Brent crude jumped roughly 3% Monday to near $112 a barrel. Fresh strikes on Saudi Arabian pipeline infrastructure and Houthi advances in the Red Sea tightened Persian Gulf supply.
This week is unusually busy for central bank watchers. The Fed meets Wednesday, the Bank of England meets Thursday, and the Bank of Japan meets Friday.
Despite the dollar’s Monday gains, Bank of America sees limited upside ahead. The firm expects the dollar to trade sideways into year-end, excluding moves against the yen.
BofA noted that dollar sentiment has been weak since Fed Chair Warsh’s July press conference, where markets flagged a lack of a clear plan to tackle above-target inflation.
The dollar has also failed to rally despite rising energy prices, which typically support the currency. Mixed signals from Fed officials, including dovish comments from Williams and Waller, have added to the uncertainty.
With more than three rate hikes now priced in for the Fed, Bank of America says the bar for the Fed to outperform market expectations is high.
The firm published its outlook on September 8, 2026, in a report titled “G10 FX back-to-school: dollar unloaded.”
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