Dollar rises as oil jumps and Fed hike bets return
A surge in oil prices triggered by escalating Middle East hostilities is pushing the dollar higher and reviving market expectations for Federal Reserve rate hikes.
The U.S. dollar extended its gains for a fourth consecutive session on Tuesday. Escalating Middle East tensions drove oil prices sharply higher, forcing investors to reprice the path of Federal Reserve interest rates.
Brent crude climbed 1.88% to $90.90 a barrel, briefly touching $91.99 for its highest level since June 11. U.S. crude rose 2.09% to $84.97. The price action followed the tenth consecutive night of U.S. military strikes on Iran and the redirection of two Saudi crude tankers in the Red Sea after threats from Yemen's Houthi movement.
The energy spike is complicating an inflation outlook that had appeared to cool just weeks ago. Comments from Fed Chairman Kevin Warsh and other officials have pushed the probability of a 25 basis point hike at next week's policy meeting to 21.9%, according to CME FedWatch. "The Fed is hawkish, I don't think the marketplace fully appreciates that yet, and the longer this conflict goes on in the Middle East, the risks of the Fed sounding even more hawkish increase," said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull.
The dollar index rose 0.17% to 101.16, putting it on track for its longest daily winning streak since mid-May. The euro slipped 0.11% to $1.1402. Against this backdrop, the Japanese yen weakened 0.41% to breach the 163 per dollar threshold for the first time since December 1986, leaving traders on high alert for potential government intervention.
Sterling fell for a fourth straight session, dropping 0.39% to $1.3376 as markets digested a change in UK leadership. Newly appointed Prime Minister Andy Burnham and Finance Minister John Healey must figure out how to finance higher government spending while adhering to previous fiscal rules. "Today's data point to a loose labor market with little wage pressure, but one that is not worsening dramatically at the current juncture," said Jack Meaning, UK chief economist at Barclays.
The Canadian dollar weakened 0.27% to C$1.411 after Washington imposed a 50% tariff on a broad range of Canadian goods. The U.S. cited Ottawa's "discriminatory treatment" of American cars, alcohol and dairy as the trigger for the duties. Attention now shifts to the European Central Bank, which meets later this week and is expected to hold rates steady while signaling at least one more hike before year-end.
