Greenback climbs as oil, US yields stay high

The U.S. dollar climbed to its highest level in months on Tuesday, fueled by surging oil prices and a rapid rise in U.S. Treasury yields. The euro slipped to a three-month low as it tumbled by 0.32% against the greenback, potentially hitting its lowest point in over a year. The British pound also weakened by 0.25% against the dollar, nearing three-month lows last week.

The Swiss franc experienced a similar decline, hitting its weakest level in four months at 0.8335 per U.S. dollar, as European currencies struggled amid energy shocks and political instability. Simultaneously, the dollar's strength was boosted by high oil prices and a thriving U.S. economy, which prompted markets to anticipate significant rate hikes by the Federal Reserve.

This, in turn, has driven U.S. Treasury yields to their highest level in two years, with the two-year yield nearing the symbolic 5% threshold. Morgan Stanley now predicts the U.S. dollar to strengthen through the end of the year and into 2027, projecting the euro could fall to US$1.10 by mid-2027. The dollar's ascent is attributed to robust U.S. growth, widening interest rate differentials with other regions, and heightened expectations of further Fed rate increases.

Meanwhile, the European Central Bank's president, Christine Lagarde, recently cautioned against some aggressive market forecasts for rate hikes. The dollar's next major test will be the forthcoming U.S. economic data, including the personal consumption expenditures price index on Wednesday and non-farm payrolls on Friday. Markets now anticipate a more than 70% probability of a Federal Reserve rate hike by the end of October.