Dollar Gains Strength on Oil Surge and Anticipated Federal Reserve Rate Hike
Market Reactions and Central Bank Decisions
By Saqib Iqbal Ahmed
Dollar and Treasury Yields Respond to Oil Prices
NEW YORK, Sept 15 (Reuters) - The dollar edged up against most major currencies on Tuesday as surging oil prices lifted Treasury yields and reinforced expectations that the Federal Reserve will hike interest rates this week.
U.S. 10-year Treasury yields hit peaks not seen since 2007 on Tuesday as investors girded for what many suspect will be the first in a series of rate increases from the Federal Reserve as it battles stubborn inflation.
Benchmark U.S. 10-year Treasury yields surged to a top of 5.041% and were last at just under 5.004%.
Oil prices held near a four-month peak, standing at over $105 a barrel, after Yemen's Iran-aligned Houthis launched a new wave of attacks on Saudi Arabia and Gulf-Iran talks were postponed.
Expectations for Federal Reserve Rate Hike
Markets now see a Fed hike on Wednesday as a near certainty, with CME's FedWatch tool pricing a 95% chance of an interest-rate increase.
While markets are prepared for a hike, investors should remain on alert for any surprises, said Juan Perez, senior director of trading at Monex USA in Washington.
"You have to be prepared for the unexpected ... this is a time of volatility," Perez said, adding that given Federal Reserve Chair Kevin Warsh's aversion to forward guidance, it was not unthinkable that the Fed may choose to hold rates.
Even if the Fed does raise rates, much of the good news for the dollar may already be priced in, Perez said. Much would depend on signals emerging from the press conference following the Fed decision.
"What tone are you giving us? ... Can we then think about December, think about the remainder of the year ... that's really what's going to affect the direction of the currency," Perez said.
Currency Movements and Global Central Banks
The dollar's six-currency index rose 0.15% to 99.631, standing near its highest in about two weeks, also gaining support from weakened risk appetite as stock markets fell.
The euro slipped 0.1% to $1.1541, not far from the one-month low of $1.1523 touched in the previous session.
Sterling weakened 0.2% to $1.3477 ahead of a Bank of England interest rate decision on Thursday where consensus is widely tilted towards a hold, though future rate hikes are expected by year-end, according to data compiled by LSEG.
Britain’s Labor Market and Sterling Outlook
Data on Tuesday showed Britain's jobs market stayed weak, with vacancies at a four-year low and pay growth steady.
Yen and Bank of Japan Policy
The dollar rose 0.5% against the yen as the Japanese currency pulled away from a seven-month high, touched a week ago. The yen briefly weakened past 155 to the dollar.
"We expect the BoJ to hike 25 bps at the upcoming meeting on 16-17 September," OCBC Group Research analysts said in a note.
"We have pencilled in 2 additional hikes of 25bps in 2027, and we expect these hikes to be front loaded should the BoJ continue their hawkish rhetoric after the September hike is delivered," they said.
Inflation Pressures and Rate Hike Outlook
Energy Prices and U.S. Economic Data
RATE HIKES AWAITED
The renewed energy-induced inflation pressures follow a U.S. jobs report that was much stronger than expected and a pickup in consumer prices for August, strengthening market conviction that the Fed will raise rates on Wednesday.
Economists polled by Reuters also expect at least one more hike by the end of March, reversing a fragile no-change consensus prior to Friday's official data showing firm inflation.
Potential Impact on Risk Assets
"If the Fed is viewed as beginning a new hiking cycle rather than calibrating monetary policy, monetary policy could have spillovers to risk assets," Gabriele Foà, a portfolio manager at Algebris Investments, said in a note.
Other Markets
Cryptocurrency Movements
In cryptocurrencies, bitcoin slipped 5% to $75,320.
(Reporting by Saqib Iqbal Ahmed in New York, Jiaxing Li in Hong Kong and Shashwat Chauhan in Bengaluru; Editing by Amanda Cooper, Jan Harvey, Chizu Nomiyama and Timothy Heritage)