Dollar slides to three-week low as yen surges, oil tops $100

The U.S. dollar slumped to its weakest level in weeks on Wednesday as a surging Japanese yen and oil prices topping $100 a barrel combined to undercut the greenback's traditional safe-haven appeal. The U.S. Dollar Index traded near 98.15, close to a three-week low, even as escalating conflict in the Middle East would typically drive demand for dollar-denominated assets.cnbc+1

The paradox at the center of foreign exchange markets this week is that a widening war in the Gulf — with Houthi strikes on Saudi cities, U.S. attacks on Iranian oil tankers, and Iranian strikes on a U.S. base in Jordan — has failed to lift the dollar. Brent crude rose above $100 a barrel for the first time since July, according to CNN, with prices climbing nearly 3% on Wednesday.cnn+2

Yen Carry Trade Unwind Rattles Markets

The yen has gained roughly 4% in September, reaching 152.89 per dollar on Tuesday — its strongest since February — as traders unwound carry trades built on borrowing cheaply in yen to invest in higher-yielding assets. Reuters reported the rapid reversal from levels near 160 less than a week earlier has revived memories of the disorderly yen unwind that shook markets in 2024.reuters+1

Markets widely expect the Bank of Japan to raise rates by 25 basis points at its September 17–18 meeting, with BNY Investments' Aninda Mitra estimating the yen's fair value in the 140s. ING analysts warned that a "very fragile" USD/JPY is dragging the broader dollar index lower and could push it toward 98.00 if support breaks.cnbc+1

Dollar Debasement Trade and Central Bank Divergence

Analysts pointed to a shift in sentiment triggered by Treasury Secretary Scott Bessent's August 19 announcement of expanded long-term bond buybacks. Rabobank said the move "appears to have undermined confidence in the greenback," while MUFG Mitsubishi UFJ Financial Group, Inc. ↘ 1.95% noted the dollar index has fallen roughly 1% since the announcement despite markets pricing in more Federal Reserve rate hikes.fxstreet

Adding pressure, the European Central Bank is widely expected to deliver a 25-basis-point hike on Thursday, limiting the policy divergence that had previously supported the dollar. Brown Brothers Harriman's Elias Haddad cautioned that "even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs".fxstreet

All Eyes on Inflation Data

Markets are now focused on U.S. producer price data due Thursday and the consumer price index on Friday, which will shape expectations ahead of the Fed's September 16 meeting. OCBC strategists said "a more decisive move will require confirmation from the upcoming inflation data".economies+2