Dollar near two-week high as oil surge lifts yields, Fed hike bets

The dollar reached near a two-week high on Tuesday as surging oil prices boosted Treasury yields, increasing expectations that the Federal Reserve would raise interest rates this week, according to the source. Risk appetite softened due to a drop in stock markets, with AI-related shares suffering as industry leaders called for slower development to address potential threats to humanity.

A Fed hike on Wednesday is now a near certainty, with the CME's FedWatch tool pricing in a 93% chance of an interest rate increase, marking the first in over three years. Christopher Wong, an FX analyst at OCBC, noted that higher oil, higher U.S. yields, and weakened risk appetite contributed to the dollar's strength. The dollar index stood at 99.55, while the euro and sterling were slightly weaker against the dollar.

The yen also retreated from a seven-month high ahead of an expected Bank of Japan rate hike on Friday. Oil prices surged to $107 a barrel, nearing a four-month peak, after Yemen's Houthis attacked Saudi Arabia and Gulf-Iran talks were postponed, adding to inflation concerns. Stronger-than-expected job growth and a rise in consumer prices for August further bolstered the Fed's rate hike conviction.

Economists surveyed by Reuters anticipate at least one more rate hike by the end of March, reversing a recent no-change consensus. The broader macro picture, however, suggests limited further hike than currently priced, favoring curve steepeners and limited USD upside.