TLDR
- The U.S. dollar climbed to its highest level in over a week on Tuesday
- Markets are pricing in a 92.1% chance of a Fed rate hike on Wednesday
- The Dollar Index rose around 0.24% to hover near 99.60
- Brent crude surged past $113 a barrel after attacks on Saudi pipeline infrastructure
- The euro fell to one-month lows near $1.1539, while the yen slipped to over one-week lows
The U.S. dollar pushed higher on Tuesday, hitting its strongest level in more than a week as traders sharply increased their bets on a Federal Reserve interest rate hike at this week’s policy meeting.
The Dollar Index, which measures the greenback against six major currencies, rose around 0.24% to trade near 99.60. On Monday, it had already touched a one-month high of 99.736.
Markets are now treating a Fed rate increase as almost certain. Data from CME FedWatch puts the probability of a 25-basis-point hike into the 3.75%-4.00% range at 92.1%, up from around 60% just last week. Money markets are also pricing in a 53.4% chance of another hike at the October meeting.
Rising Oil Prices Add Pressure
Crude oil prices added fuel to the dollar’s rally. Brent crude climbed past $113 a barrel after fresh attacks on Saudi Arabian pipeline infrastructure and Houthi strikes in the Red Sea.
Higher oil prices are pushing inflation concerns higher, which in turn pushes Treasury yields up. Benchmark U.S. 10-year Treasury yields climbed above 5% on Tuesday for the first time since 2007.
As the U.S. is an oil exporter, rising energy prices tend to benefit the dollar. BNY’s John Velis said monetary policy needs to keep inflationary expectations under control even if it is not well suited to offsetting a supply shock.
DBS analysts warned against chasing the dollar’s rally ahead of the Fed meeting, noting that two senior Fed officials had signaled a willingness to hold rates before entering their blackout period.
Euro and Yen Under Pressure
The euro dropped 0.1% on the day to trade near $1.1539, its lowest level in a month. Traders are weighing stagflation risks in the euro area against a stronger dollar, even after the European Central Bank raised rates by a quarter point to 2.50% last week.
The Japanese yen fell 0.3% to touch an over one-week low of 154.82 per dollar. That marks a pullback from a seven-month high of 152.89 reached last week.
The Bank of Japan is expected to deliver its own rate decision on Friday. Markets are watching closely to see if the BOJ signals a faster pace of tightening after an expected hike to 1.25%.
The yen has gained about 4% this month, driven by capital repatriation and a surge in Japan’s 10-year government bond yield to a 30-year high of 3.025%.
This week is packed with major central bank decisions, with the Fed’s two-day meeting starting Tuesday and the BOJ meeting on Friday.
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