Greenback Surges to Weekly Peak as Fed Hike Probability Reaches 92%

Key Highlights

• The greenback reached its strongest position in over a week during Tuesday’s trading session
• Fed rate hike probability for Wednesday’s meeting stands at 92.1%
• The Dollar Index advanced approximately 0.24% to trade around the 99.60 level
• Brent crude jumped above $113 per barrel following attacks on Saudi energy infrastructure
• The euro declined to one-month lows around $1.1539, with the yen dropping to more than one-week lows

The U.S. dollar gained momentum on Tuesday, reaching its most robust level in over seven days as market participants dramatically raised their expectations for a Federal Reserve rate increase during the upcoming policy announcement.

The Dollar Index, tracking the U.S. currency against a basket of six major rivals, advanced roughly 0.24% to hover around 99.60. A day earlier, the index had already climbed to a monthly peak of 99.736.

US Dollar Index (DX-Y.NYB)

Financial markets are now viewing a Fed rate move as virtually guaranteed. According to CME FedWatch data, there’s a 92.1% likelihood of a 25-basis-point increase to the 3.75%-4.00% target range, a substantial jump from approximately 60% recorded a week earlier. Money market pricing also indicates a 53.4% probability of an additional hike coming in October.

Energy Market Volatility Bolsters Dollar

Crude oil prices provided additional momentum to the dollar’s advance. Brent crude surged beyond $113 per barrel following renewed attacks targeting Saudi Arabian pipeline facilities and Houthi operations in the Red Sea region.

Elevated oil prices are intensifying inflation worries, which consequently drive Treasury yields upward. The benchmark U.S. 10-year Treasury yield broke through the 5% threshold on Tuesday, marking its first such breach since 2007.

Given that the U.S. functions as an oil exporter, elevated energy costs typically support the dollar. John Velis from BNY noted that monetary policy must maintain control over inflationary expectations, despite not being ideally designed to counteract supply-side disruptions.

DBS analysts cautioned against aggressively pursuing the dollar’s upward movement ahead of the Fed announcement, pointing out that two high-ranking Fed officials had indicated openness to maintaining current rates before their pre-meeting communications blackout began.

European and Japanese Currencies Face Headwinds

The euro declined 0.1% during the session to hover near $1.1539, representing its weakest level in four weeks. Market participants are balancing stagflation concerns across the euro area against dollar strength, despite the European Central Bank’s quarter-point rate increase to 2.50% during last week’s meeting.

The Japanese yen weakened 0.3% to reach an over one-week low at 154.82 against the dollar. This represents a retreat from the seven-month peak of 152.89 achieved the previous week.

The Bank of Japan faces its own rate decision on Friday. Market observers are closely monitoring whether the BOJ will indicate an accelerated tightening timeline following an anticipated increase to 1.25%.

The yen has appreciated approximately 4% throughout this month, supported by capital repatriation flows and Japan’s 10-year government bond yield surging to a three-decade high of 3.025%.

This week features a concentrated schedule of major central bank policy decisions, with the Fed’s two-day gathering commencing Tuesday and the BOJ’s meeting scheduled for Friday.

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