Oil surge past $90 fuels dollar rally, rate hike bets

Crude oil prices surged well above $90 per barrel in the first week of September as renewed U.S.-Iran military strikes threatened Middle East supply lines, sending the dollar higher and pushing the 10-year Treasury yield toward 5% in a convergence of forces that has sharpened expectations for a Federal Reserve rate hike later this month.

Oil and the Dollar

West Texas Intermediate crude settled at $91.01 per barrel on Wednesday, while Brent crude closed at $95.63, after U.S. and Iranian forces exchanged their most intense strikes in weeks. The oil rally began on September 1 when Brent jumped 4.6% and WTI surged 5.2% in a single session, settling at five-week highs. By Thursday, WTI opened near $91.69 and Brent at $95.75.forbes+2

The spike in energy costs has bolstered the dollar, with the U.S. Dollar Index climbing to 99.15 on Friday, up 0.27% on the session. The greenback has benefited from both safe-haven demand and the growing belief that persistent inflation will force the Fed to tighten policy. MUFG currency strategist Lee Hardman noted earlier this summer that if oil prices continued to rise sharply, "it could reinforce the dollar's recent upward momentum especially now that the Fed has indicated that it is open to raising rates this year".cnbc+2

Bond Market Pressure

The oil-fueled inflation anxiety has intensified a "bear steepening" in Treasuries. The 10-year yield closed Friday at 4.78%, after touching 4.818% midweek — its highest level since November 2023. The 30-year yield reached 5.24%, a two-decade high. As Wolf Richter of Wolf Street wrote, the forces driving yields higher "aren't going away anytime soon as neither the Fed nor the government is willing to do what it takes".wolfstreet+1

The combination of surging energy costs and elevated yields has given markets fresh reason to price in tighter monetary policy. Prediction market Kalshi placed the probability of a 25-basis-point rate hike at the September 15-16 Federal Open Market Committee meeting at roughly 51% as of September 4, with a hold at about 47%. Those odds jumped after Fed Chair Kevin Warsh struck a hawkish tone in late August, with CME FedWatch briefly showing a 66% chance of a hike.oddsshopper+1

What Comes Next

J.P. Morgan JPMorgan Chase & Co. ↘ 0.94% wealth management strategists have said they expect a quarter-point increase in September, though Morningstar ↘ 2.95% analysts cautioned that softer inflation prints could keep the Fed on hold. The August consumer price index report, due before the Fed meeting, will likely be the deciding factor.chase+1

For now, the interplay between Middle East conflict, energy prices, and monetary policy expectations has left markets caught between competing risks — with the 5% threshold on the 10-year yield looming as the next psychological test for bond investors.