The US dollar index has rallied to its highest level in nearly two months, rising 0.15% to 101.28 after hitting 101.39, its strongest since July 29. Latest comments from Fed officials have signaled that high inflation is a key concern for them and is not driven by just elevated oil prices. The dollar was set for its first back-to-back weekly gains in more than three months on Friday, as surging Treasury yields and mounting bets on further Federal Reserve rate hikes kept the greenback near multi-month peaks. The dollar index, which measures the US currency against a basket of peers, has climbed more than 1% this week to a two-month high, marking its first back-to-back weekly gains since June. As per The Economic Times, markets have aggressively repriced the interest rate trajectory after the Fed tightened policy last week, while robust economic data and fresh energy supply concerns have further strengthened that conviction.
Expectations the Fed will hike rates by at least 25 basis points at its October meeting climbed to about 70% after Wednesday's data, up from roughly 53% before the release, according to LSEG data. Federal Reserve Bank of Chicago President Austan Goolsbee said the central bank needs to "be careful" and may need to treat the current energy shock as a source of persistent inflation rather than expect it to dissipate on its own. The Fed last week lifted its benchmark rate by 25 basis points to 3.75%-4% and signalled another increase could come before year-end. Traders are pricing in a 53% chance of a rate hike in October, according to the CME FedWatch Tool. As per Brown Brothers Harriman's Elias Haddad, "What's driving the dollar higher is a follow through from the hawkish Fed hike that we got last week and that's just given the dollar some renewed momentum." According to CNBC TV18, traders now see a nearly 70% chance of another increase when the US central bank next meets in October, up from the 50% probability a week ago.
The dollar extended gains after S&P Global said its flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 58.4 this month, its highest since July 2021, after a 56.0 reading in August. The surge was powered by a surge in new orders, though strong demand strained supply chains and pushed prices higher. A stronger-than-expected purchasing managers' report overnight fanned new price concerns, with a poorly received auction of five-year U.S. Treasury notes triggering a fresh round of bond selling, with five-year yields crossing 5% for the first time since 2007. The euro was down 0.51% at $1.1389 and on pace for its third straight daily decline and biggest drop in a week, while the Japanese yen weakened 0.52% against the greenback to 158.19 per dollar as traders gird for any signs of intervention after the Bank of Japan's rate hike to a 31-year high last week fell short of reassuring investors. As per CNBC TV18, signs the US economy may be overheating are now firmly in focus, and policymakers may need to tighten further if inflation continues to surprise on the upside.
Oil prices jumped after Mohsen Rezaei, secretary of Iran's Supreme National Security Council, said in an interview with state TV that as long as Iran's conditions are not met, the Strait of Hormuz would not be reopened and there would be no negotiations. A senior Iranian official told Reuters that Iran and the United States remain far apart on how to end their war but diplomacy must continue, after Iran's president told the UN General Assembly that Tehran would never surrender to US pressure. Oil prices jumped more than 3% on Thursday to a one-week high after a Houthi missile attack on Saudi Arabia revived fears of supply disruptions, adding to inflation risks. Hopes that diplomacy at the UN General Assembly could lead to a resolution to the seven-month-long Iran war had helped push oil prices lower since reaching a four-month high in mid-September, but have since reversed course this week. As per MUFG currency analyst Michael Wan, "The good news is that oil prices have moderated somewhat from the highs but the path forward remains unclear given the lack of clarity around a possible resolution of the conflict."
The rupee weakened by 11 paise to close at 95.73 against the US dollar on Wednesday, pressured by the strength of the American currency and a modest recovery in crude oil prices from recent lows. During the session, the rupee touched an intraday low of 95.76 before ending at 95.73, down 11 paise from its previous close. According to Seema Srivastava, Senior Research Analyst at SMC Global Securities, a rising US Dollar, driven by strong American economic data and a hawkish Federal Reserve, typically acts as a significant headwind for Indian equity benchmarks like the Sensex and Nifty 50. When the dollar strengthens and US Treasury yields rise, Foreign Institutional Investors often pull capital out of emerging markets like India to secure safer, higher returns in the United States, directly hitting large-cap index heavyweights and tightening domestic liquidity. A strengthening dollar inherently forces the Indian Rupee to depreciate, as India imports over eighty percent of its crude oil requirements, drastically inflating the national import bill and widening the current account deficit. Kunal Sodhanim, Head - Treasury, Shinhan Bank, noted that the combination of a stronger US dollar and a rise in crude oil prices would be a more challenging setup for Indian equities, potentially increasing volatility in the Sensex and Nifty.
