The US Dollar Index (DXY) has strengthened to 99.41, holding near its highest levels in two weeks after gaining ground as oil prices surged and Treasury yields rose. According to The Economic Times, markets now see a Fed hike on Wednesday as a near certainty, with CME's FedWatch tool pricing in a roughly 93% chance of an interest-rate increase, which would be the first in more than three years. The dollar gained support as risk appetite weakened after stock markets tumbled, with AI-related shares under pressure after industry leaders called for slower development to contain potential threats to humanity. The euro was slightly weaker against the dollar at $1.1569, while sterling was also weaker at $1.3468, as reported by The Economic Times.
Brent crude futures have risen above $107 per barrel as trading resumed, with both major benchmarks breaching the $100 mark earlier this week. As reported by Business Standard, oil prices extended their gains as Saudi Arabia's East-West pipeline remained shut, while Ukraine disputed President Trump's claim that it had already reached an agreement with Russia to halt attacks on energy infrastructure. The surge in oil prices was driven by conflict in Saudi Arabia and delays in Gulf-Iran discussions, with oil futures reaching their highest level since May driven by escalatory strikes between Iran and the US. Hormuz flows have fallen below two million barrels per day, making the move through $100 increasingly physical rather than merely geopolitical. The combination of higher oil prices and weaker risk appetite helped lift the US dollar broadly, with the yen also pulling away from a seven-month high.
August producer inflation reached 5.4% year-on-year, providing the Federal Reserve with continued justification for maintaining its aggressive stance. The US economy added 162,000 jobs last month, while Brent crude has risen above $107, further supporting the case for continued monetary tightening. As reported by The Economic Times, those inflation pressures follow a much stronger than expected jobs report and a pickup in consumer prices for August, strengthening market conviction that the Fed will raise rates on Wednesday. The yield on the 10-Year US Treasury note reached 5% on Tuesday, rising for the fifth consecutive session as elevated oil prices fueled inflation concerns. Economists polled by Reuters also expect at least one more hike by the end of March, reversing a fragile no-change consensus that prevailed before official data showed firm inflation.
Futures markets price approximately 93% odds of a Fed rate hike this week, creating a stark divergence from economist expectations. According to The Economic Times, the combination of higher oil, higher U.S. yields and weaker risk appetite helped lift the U.S. dollar broadly, with Christopher Wong, FX analyst at OCBC, noting that near-term support may persist, but with a hike now heavily priced in, further dollar upside will likely require the Fed to keep the door open to additional tightening. The market faces a significant decision point, with Friday's US CPI data expected to show 3.4% annual inflation and the Fed meeting scheduled for September 15-16, followed by the Bank of Japan on September 17-18. Markets are also all but certain that the Bank of Japan will raise rates on Friday, with market sentiment on the yen starting to shift as speculators turned to a net long position on the Japanese currency for the first time since February.
