As rising oil prices increased Treasury yields and strengthened anticipation that the Federal Reserve will hike interest rates this week, the dollar edged up to trade close to a two-week high on Tuesday. It also gained support as risk appetite diminished following the decline in stock markets, with AI-related shares facing pressure after industry leaders advocated for a more measured pace of development to mitigate potential threats to humanity. Markets currently anticipate a Federal Reserve rate hike on Wednesday as nearly inevitable, with CME’s FedWatch tool indicating approximately a 93% probability of an interest-rate increase, marking the first such move in over three years. “The combination of higher oil, higher U.S. yields and weaker risk appetite helped lift the U.S. dollar broadly,” Christopher Wong said in a note. Near-term support may persist; however, with a hike now heavily priced in, further dollar upside will likely necessitate the Fed maintaining the possibility of additional tightening, he added.
The dollar index, which measures the greenback against a basket of currencies, was last at 99.55. The euro exhibited a modest depreciation against the dollar, trading at $1.1538, while sterling also showed a slight decline, positioned at $1.3494. The yen retreated from a seven-month high, currently down approximately 0.2% at 154.72 in anticipation of a potential rate hike by the Bank of Japan on Friday. Oil prices increased to $107 a barrel, approaching a four-month high, following the attack on Saudi Arabia by Yemen’s Iran-aligned Houthis and the postponement of Gulf-Iran discussions. That contributed to inflation concerns and pushed benchmark 10-year Treasury yields to surpass the significant psychological threshold of 5% for the first time since October 2023 in the prior session.
The yield last traded at 4.9895%. Inflationary pressures are emerging in the wake of a jobs report that exceeded expectations, coupled with an increase in consumer prices for August. This development is bolstering market confidence that the Federal Reserve will implement a rate hike on Wednesday. Economists surveyed by Reuters anticipate at least one additional rate hike by the conclusion of March, overturning a tenuous consensus of no change that existed prior to the release of official data on Friday, which indicated persistent inflation. The inflation outlook now hinges on oil prices, but the broader macro picture does not warrant more hikes than currently priced in the curve, analysts said in a note.
“Limited hawkishness from here argues for curve steepeners and limited USD upside.” Markets are nearly unanimous in their expectation that the Bank of Japan will increase interest rates on Friday. Market sentiment regarding the yen is beginning to change, as speculators have adopted a net long position on the Japanese currency for the first time since February. Elsewhere, the New Zealand dollar and the Australian dollar experienced a decline of approximately 0.1%, with the latest values at $0.5769 and $0.7133, respectively. Offshore yuan remained unchanged at 6.708 per dollar, staying close to its highest level in over three years, as market participants anticipate the release of industrial output and retail sales data later today.
