Dollar climbs near two-week high as Fed rate hike bets rise

The US dollar rally strengthened as surging oil prices lifted Treasury yields and markets priced in a likely Federal Reserve rate hike.

HONG KONG: The US dollar rally gathered momentum on Tuesday, September 15, pushing the currency close to a two-week high as surging oil prices, higher Treasury yields and expectations of an imminent Federal Reserve interest rate increase reshaped global markets.

The dollar index, which measures the US currency against six major peers, traded around 99.55 after touching its strongest level since September 2. The move extended Monday’s gains, when investors turned towards the dollar as risk appetite weakened across financial markets.

Why is the dollar strengthening?

Interest rate expectations are the biggest immediate driver.

Markets are pricing in roughly a 93% probability that the Federal Reserve will raise interest rates at its Wednesday meeting, according to CME FedWatch data cited by Reuters. Such a move would be the Fed’s first rate increase in more than three years.

Higher interest rates can make dollar-denominated assets more attractive to investors, particularly when US bond yields are also climbing.

Benchmark 10-year US Treasury yields moved above 5% during the previous session before easing to around 4.99%. Rising yields followed stronger US employment figures, firmer consumer inflation and another sharp increase in energy prices.

Oil has become especially important to the outlook.

Prices climbed to around $107 a barrel, near a four-month high, as renewed Middle East tensions raised concerns about energy supplies. Higher oil costs can add to inflation, strengthening the argument for central banks to keep monetary policy tight.

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What does a stronger dollar mean globally?

The US dollar rally is already putting pressure on other major currencies.

The euro traded around $1.1538, close to a one-month low, while sterling was near $1.3494. The Japanese yen also weakened against the dollar, trading around 154.72, even as markets prepared for a possible Bank of Japan rate increase on Friday.

A stronger dollar can have wider consequences, particularly for economies that import commodities priced in the US currency.

Oil, metals and many internationally traded goods are dollar-denominated. When the greenback strengthens, those imports can become more expensive in local-currency terms, potentially adding inflation pressure in some markets.

For Gulf economies whose currencies are pegged to the dollar, movements in US monetary policy are particularly important because regional central banks often closely follow Federal Reserve rate decisions.

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What happens next?

Attention now turns directly to the Federal Reserve.

With a rate increase largely priced into markets, investors will closely examine the Fed’s accompanying guidance for clues about whether further tightening could follow.

If policymakers signal that additional increases remain possible, the dollar could receive further support. A more cautious message could limit the currency’s advance because traders have already priced in substantial tightening expectations.

Impact to expect

Pressure. A sustained US dollar rally could increase costs for some import-dependent economies, weigh on competing currencies and keep financial conditions tight, while higher US rates could influence borrowing costs well beyond America.