US dollar rises to 2-week high; Middle East conflict and rate paths in focus
The greenback tends to benefit from higher oil prices
The US dollar surged to a two-week high on September 2, 2023, amid growing worries about the economic consequences of the energy crisis and the contrasting monetary policy strategies in key economies. Tensions between Iran and its neighboring Arab nations reignited on September 2, with the most intense exchange of fire between Tehran and Washington since July.
The greenback often gains when oil prices are high, given that the American economy is less vulnerable to energy shocks compared to other significant economies, thus drawing demand and pushing down currencies such as the euro and yen.
Economists generally anticipate the European Central Bank (ECB) nearing the end of its tightening cycle by the conclusion of the year, while the Federal Reserve is bracing for potential rate hikes in 2027, as noted by George Brown, a senior economist at Schroders. Brown predicts that the widening rate differentials in favor of the dollar will lead to a weaker euro, projecting that the single currency could drop to US$1.10 against the dollar by year-end.
However, a decline in US Treasuries, fueled by fears about inflation and the nation's fiscal outlook, could negatively impact the greenback. Elevated debt levels and sustained price pressures increase doubts about the long-term viability of US assets. The dollar index climbed 0.20 percent to 99.865, marking its highest level since August 17, while the euro fell 0.16 percent to US$1.1575, following its lowest point since August 20. The yield on the benchmark 10-year US note rose to 4.8182 percent, the highest since November 2023.
Japan's benchmark 10-year yield surged to 3.01 percent, surpassing the three-decade high of 3 percent from the previous Tuesday. Markets now anticipate a 68 percent probability of a September Federal Reserve rate hike, up from approximately 40 percent a week ago, according to CME Group’s FedWatch tool. The Japanese yen appreciated by 0.25 percent against the dollar to 159.89 per dollar, just above the psychologically significant 160 threshold, as traders assess the Bank of Japan's (BOJ) rate strategy.
BOJ Governor Kazuo Ueda hinted at the possibility of consecutive rate increases. Kit Juckes, a strategist at Societe Generale, highlighted hawkish statements from BOJ board member Hajime Takata, emphasizing that the yen's rally is driven by hawkish comments, irrespective of concerns over the impact of rising energy prices on growth outlooks and debt sustainability.
A rare coordinated intervention by the US and Japan at the end of July temporarily stabilized the yen, moving it away from the 40-year low of 163.99, but it has since lost about half of those gains. The New Zealand dollar experienced a 1.01 percent decline against the dollar to US$0.5844, the lowest since August 13, even following the country’s central bank rate hike, as it cautioned that additional moves would be measured, warning of mounting risks to the economic outlook.
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