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

The U.S. dollar reached near a two-week high on Tuesday as escalating oil prices boosted Treasury yields and heightened expectations of a Federal Reserve interest rate increase, according to a report. The greenback also benefited from a decline in risk appetite following a sharp drop in stock markets, with artificial intelligence-related shares facing pressure after prominent figures called for more cautious development to mitigate potential dangers to humanity.

Analysts at CME's FedWatch tool now estimate a 93% probability of a rate hike on Wednesday, marking the first in over three years. Christopher Wong, an FX analyst at OCBC, noted that the combination of higher oil prices, elevated U.S. yields, and a weakening risk appetite contributed to the dollar's overall strength. While near-term support remains, additional dollar gains may depend on the Federal Reserve maintaining its path for further tightening.

The dollar index, which gauges the greenback's value against a basket of currencies, was last recorded at 99.55. The euro and British pound showed slight weakness against the dollar, trading at $1.1538 and $1.3494, respectively. Meanwhile, the Japanese yen weakened from a seven-month high, slipping roughly 0.2% to 154.72 prior to a probable Bank of Japan rate increase on Friday.

Oil prices surged to $107 a barrel, nearing a four-month high, following Yemen's Houthis' attack on Saudi Arabia and postponed Gulf-Iran negotiations. This development added to inflation concerns and propelled 10-year Treasury yields past the significant psychological level of 5% for the first time since October 2023. Inflation pressures were fueled by a stronger-than-expected jobs report and a rise in consumer prices for August, reinforcing the perception that the Fed would raise rates on Wednesday.

Economists surveyed by Reuters also anticipate at least one more rate hike by the end of March, overturning the cautious no-change outlook that prevailed before official data revealed robust inflation. Analysts at BCA believe that limited expectations of rate hikes now favor steeper yield curves and constrained U.S. dollar upside.

Market sentiment on the yen appears to be shifting, with speculators transitioning to a net long position in the Japanese currency for the first time since February. Conversely, the New Zealand dollar and Australian dollar both dipped by approximately 0.1%, settling at $0.5769 and $0.7133, respectively. Lastly, the offshore yuan remained relatively stable at 6.708 per dollar, nearing its strongest level in over three years, as markets await industrial output and retail sales data later in the day.