The U.S. dollar on Tuesday climbed to its highest level in two weeks a day ahead of the Federal Reserve’s latest interest rate decision, as currency market participants geared up for a widely anticipated rate hike. A surge in U.S. Treasury yields further elevated borrowing costs, while oil prices extended their weekly jump.
The U.S. dollar index, which tracks the greenback against a basket of six major peers, rose 0.3% to 99.66, its highest since September 1.
According to the CME FedWatch tool, the chances of the Federal Open Market Committee (FOMC) announcing a 25 basis point rate hike on Wednesday stand at 94.5%, up from 59% a week ago. Higher rate environments tend to strengthen the dollar.
The rise in rate hike expectations have been driven by a relentless rout in the U.S. bond market, inflationary concerns from spiking oil prices, recent U.S. labor market and inflation data, and increasingly hawkish commentary from Fed policymakers.
The U.S. 10-year yield, which is used as the benchmark for everything from mortgages to corporate debt to student loans, added 4.7 basis points to 5.008% on Tuesday, hitting its highest level since April 2007. The 30-year yield took out a fresh high of over 24 years.
The bond sell-off has also been sparked by concerns over the billions of dollars being poured into the artificial intelligence infrastructure buildout, and ballooning U.S. fiscal debt.
oil marched higher on Tuesday, with Brent crude futures, the global benchmark, last up 2.6% to $108.40 a barrel. U.S. West Texas Intermediate crude futures advanced 4.1% to $105.56 a barrel. The latest advance was driven by reports that oil loadings at a critical Saudi Arabian Red Sea port had been suspended and that Libya had halted operations at three oilfields.
It now remains to be seen whether the Fed will deliver its first rate hike in over three years, especially against a political backdrop of President Donald Trump putting pressure on Fed Chair Kevin Warsh to cut rates and midterm elections in November.
The Japanese yen pulled further away from its recent peaks, touching an over one-week low of 155.12 per dollar. The retreat extends the yen’s pullback from its seven-month high of 152.89 reached last week, as markets brace for an anticipated rate hike by the Bank of Japan on Friday.
In contrast, the euro languished at one-month lows, down 0.1% to $1.1540. Foreign exchange traders continued to weigh eurozone stagflation risks against a hawkish greenback, even after the European Central Bank increased borrowing costs by a quarter point to 2.50% last week.
