Dollar crawls higher ahead of ECB, US inflation data

The U.S. dollar gained traction on Thursday, September 10, as global bond yields climbed towards record levels, largely due to surging oil prices and bond yields. The euro steadied near its two-week peak ahead of a potential European Central Bank interest rate hike. Oil futures surged nearly 1.5% to $102.72 a barrel after Iran and the U.S. unleashed their most intense shipping attacks since the start of their conflict.

Inflation fears loomed ahead of winter in Europe, with refined fuel prices, including heating oil and natural gas, skyrocketing. The ECB is expected to raise eurozone rates for the second time since Russia's invasion of Ukraine in late February. However, the dollar did not rally as expected, as European energy dependence and ongoing war volatility weakened its safe-haven appeal.

The dollar index, tracking the greenback's strength against peers, edged up 0.13%, but was still set for a weekly decline of 0.26%. Richard Franulovich, Westpac Institutional Bank's FX strategy head, noted that the dollar's resilience was faltering amid ongoing war dynamics, central bank tightening, and U.S. Treasury intervention.

Treasury Secretary Scott Bessent advocated using financial might as a foreign policy tool, while Washington announced a larger bond buyback operation to curb surging long-term yields. The Japanese yen gained over 6% since late July, trading at 154 per dollar, on course for seven-month highs, ahead of a potential BOJ rate hike. U.S. inflation data, including producer and consumer prices, will be crucial for the yen's outlook and the Federal Reserve's Sept 15 and 16 interest rate decision.

A 60% chance of a Fed rate hike in September exists, following a better-than-expected nonfarm payrolls report. Despite higher inflation potentially warranting tighter policy, additional rate hikes could raise government borrowing costs at a time when fiscal deficits and debt servicing are already under scrutiny. The offshore Chinese yuan traded near 6.707 per dollar, near its highest in nearly four years, as China's producer and consumer prices rose due to elevated energy costs.