Dollar Strengthens on Fed Rate Hike Bets

The dollar index rose above 99.7 on Wednesday, reaching its highest level in nearly three weeks as surging oil prices intensified inflation concerns and reinforced expectations for an imminent Federal Reserve interest rate hike. Oil prices advanced for a third consecutive session amid escalating hostilities between the US and Iran, raising concerns over further disruptions to energy flows from the Middle East. Meanwhile, Fed Chair Kevin Warsh’s commitment to combating inflation strengthened bets for a rate increase, with markets now pricing in around a 70% chance of a move this month. Fed Governor Michael Barr also said on Tuesday that the central bank should be prepared to raise interest rates if inflation fails to ease. Attention now turns to the ADP employment report due Wednesday and nonfarm payrolls on Friday for further clues on the Fed’s policy path.

The dollar index rose to above 99.6, extending the rebound from the three-month low of 98.8 from August 21st, and tracking the surge in yields across the curve inflationary risks aligned with the outlook of a more hawkish Federal Reserve. The US and Iran reignited attacks against each other and further dimmed the small prospects that energy flows through the Strait of Hormuz could improve in the near term. The rise in energy prices added to inflationary pressures shortly after a series of FOMC members, including Chairman Warsh, warned that inflation could warrant a rise in interest rates. The Chairman also noted that the labor market has been under full employment recently, aligned with annual revisions to nonfarm payrolls that were well below recent downgrades. In the meantime, evidence of higher inflation in the Eurozone added to the consensus of an ECB rate hike, limiting the rebound for the DXY.

The dollar index rose above 99.5 on Tuesday, recouping losses from the previous session as investors continued to assess prospects for Federal Reserve interest rate hikes following hawkish comments from Chair Kevin Warsh and rising oil prices. Investors are also bracing for a busy economic calendar, with the latest US manufacturing and services activity data due later today, ahead of the highly anticipated August jobs report on Friday. Warsh said on Friday that the Fed will “have work to do” if policymakers lack sufficient confidence that inflation is moving toward 2%, signaling the potential for an imminent rate increase to curb persistent price pressures. Markets are now pricing in a more than 65% chance of a September hike, up from around 36% before his remarks. Meanwhile, oil prices climbed for a second straight day after US forces struck an island in the Strait of Hormuz, while Iran responded with attacks on the UAE and Jordan.