USD Appreciates on Thursday

The dollar index rose to 99 on Thursday, as another rally in oil prices amid escalating hostilities between the US and Iran prompted investors to increase bets on a Fed rate hike next week. Markets are now pricing a 70% chance of a 25bps increase, up from 60% yesterday, while a hike is fully priced in for October. Meanwhile, the PPI report did little to alter expectations for a Fed hike, but confirmed that energy prices continued to fuel inflationary pressures. Headline producer inflation accelerated to 0.4% mom while core PPI rose 0.2% mom, below both the previous month’s 0.3% increase and forecasts of 0.3%. The CPI report on Friday will be key in assessing the outlook for price pressures. Elsewhere, the ECB raised borrowing costs by 25bps as expected and lifted its inflation forecasts.

The dollar index held around 98.8 on Thursday, pausing its recent decline as investors awaited key inflation figures that could shape the Federal Reserve’s next policy decision. The US producer price index for August is due later today, followed by the consumer inflation report on Friday. Other major economic releases scheduled for today include weekly jobless claims and existing home sales data. Markets are currently pricing in roughly a 60% probability of a 25-basis-point rate hike by the Fed next week following stronger-than-expected jobs data. Meanwhile, Treasury yields surged after the Treasury Department announced plans to buy back up to $6 billion in longer-term debt, three times the usual amount, though the move still disappointed some investors who had anticipated a larger increase. Elsewhere, oil prices moved higher as the US-Iran conflict intensified, stoking inflation concerns and strengthening expectations for near-term rate hikes.

The dollar index fell to around 98.6 on Wednesday, sliding for the third straight session to its weakest level in four months, attributed mainly to the yen’s rapid rise. The yen extended gains as US Treasury Secretary Scott Bessent warned traders on betting against the currency, saying he has “pretty good insight” on what the Bank of Japan will do when he is making a call and intervening with the yen. Investors also braced for key US inflation readings this week that could provide further clues on the Federal Reserve’s policy outlook ahead of next week’s meeting. Markets are currently pricing in roughly a 60% chance of a 25-basis-point Fed rate hike following stronger-than-expected jobs data released Friday. The European Central Bank and Bank of Japan are likewise expected to tighten monetary policy this month. Meanwhile, oil prices continued to rally on escalating hostilities in the Middle East, heightening inflationary risks and boosting rate hike bets.