Dollar hits two-week high as oil surge fuels Fed hike bets

The US dollar climbed to a two-week high on Monday as surging oil prices and rising expectations of a Federal Reserve rate hike this week drove investors toward the greenback, weakening major currencies across the board.

The US Dollar Index rose roughly 0.5% to 99.59, its highest level since September 2, according to Reuters. Brent crude jumped 3% to $108 per barrel after new Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf compounded supply concerns following the closure of a key Saudi oil pipeline. The pipeline, which carries up to 7 million barrels per day, had become a critical alternative route for Saudi exports after the Strait of Hormuz was effectively shut down earlier this year.thedarksideoftheboom.substack+3

Markets are now pricing in an 86% chance that the Fed will raise rates by 25 basis points at Wednesday's FOMC meeting, according to the CME Group's ↗ 0.54% FedWatch tool, up from roughly 60% a week earlier. The shift followed Friday's US consumer price data showing core CPI rose 0.3% month-over-month in August, above expectations of 0.2%.reuters+3

A Credibility Test for Warsh

The rate decision looms as a pivotal moment for Fed Chair Kevin Warsh, who signaled at Jackson Hole that the central bank would need to tighten policy if inflation failed to slow sufficiently toward its 2% target. Analysts at Commonwealth Bank of Australia warned that Warsh "will need to match his tough rhetoric with policy action or risk further undermining his credibility on controlling inflation".mufgresearch+1

ING said it now expects a 25-basis-point hike to 4.00% on Wednesday. Goldman Sachs The Goldman Sachs Group, Inc. ↗ 0.92% reversed its earlier call for rates to stay steady, while JPMorgan ↗ 0.76% now forecasts hikes in both September and December.fxempire+1

Despite the hawkish repricing, dollar gains have been muted relative to the move in yields. MUFG Mitsubishi UFJ Financial Group, Inc. ↗ 2.58% noted that the Dollar Index strengthened only 0.3% even as two-year Treasury yields jumped 26 basis points last week, suggesting traders want confirmation of policy action before extending positions.mufgresearch

Currencies Buckle Under Dollar Strength

EUR/USD fell to a one-month low near 1.1565, weighed down by the hawkish Fed outlook even as the European Central Bank raised rates last week and hinted at further tightening. Sterling slipped to $1.3503 ahead of Thursday's Bank of England decision, where roughly 75% of market participants expect rates to remain unchanged.tradingpedia+2

The Japanese yen weakened 0.3% to 154.03 per dollar, pulling back from a seven-month high of 152.89 hit last week. The Bank of Japan is widely expected to raise rates by 25 basis points on Friday, but as Kieran Williams at InTouch Capital Markets told Reuters, "the bigger FX surprise risk is probably not who hikes, but who fails to validate current pricing".reuters

Oil Supply Fears Cap Risk Appetite

The broader risk-off tone was reinforced by the deteriorating situation in the Middle East. Oman-led talks with Iran on a temporary shipping route through the Strait of Hormuz have been postponed, and Saudi Arabia's East-West pipeline remains shut as a precaution after drone attacks from Iraq. With Brent trading more than 50% above pre-conflict levels, the inflation premium in energy markets shows few signs of fading.investing+3