US, Sep 15 : The US dollar edged higher on Tuesday, remaining close to a two week peak as a sharp rise in oil prices pushed Treasury yields higher and strengthened expectations of an interest rate increase by the Federal Reserve this week.
The greenback also benefited from a deterioration in global risk sentiment after stock markets came under pressure. Artificial intelligence related shares declined after several industry figures called for a more measured pace of AI development, citing concerns over potential risks to humanity.
Financial markets are now placing strong odds on the Federal Reserve raising interest rates on Wednesday. The CME FedWatch tool indicated about a 93% probability of an increase, which would mark the first such move in more than three years.
Christopher Wong, an FX analyst at OCBC, said the combination of higher oil prices, rising US yields and weaker investor appetite for risk had provided broad support to the dollar.
He cautioned, however, that because the expected policy move is already largely reflected in market pricing, further gains for the US currency could depend on whether Federal Reserve officials signal the possibility of additional tightening.
The dollar index, which tracks the currency against a basket of major currencies, stood at 99.55.
The euro slipped slightly to $1.1538, while the British pound weakened to $1.3494. The Japanese yen also retreated from a seven-month high, falling around 0.2% to 154.72 ahead of an expected Bank of Japan rate increase on Friday.
Oil Prices Add to Inflation Concerns
Oil prices climbed to around $107 a barrel, close to a four-month high, following an attack by Yemen’s Iran-aligned Houthi movement on Saudi Arabia and the postponement of talks between Iran and Gulf countries.
The jump in crude prices has heightened concerns about renewed inflationary pressure and contributed to a sharp rise in US government bond yields. The benchmark 10-year Treasury yield crossed 5% in the previous session for the first time since October 2023. It was last quoted at 4.9895%.
Inflation concerns have been reinforced by a stronger-than-expected US employment report and an acceleration in consumer prices during August. The latest economic indicators have strengthened expectations that policymakers will opt for a rate increase on Wednesday.
A Reuters poll of economists also showed expectations for at least one additional increase by the end of March, reversing a previously uncertain outlook for unchanged rates following Friday’s inflation data.
Analysts at BCA said the inflation outlook would remain closely tied to developments in energy prices. However, they noted that the broader economic environment did not currently justify more increases than those already reflected in financial markets.
The firm said limited scope for a more aggressive policy stance could restrict further gains in the dollar while encouraging a steeper US yield curve.
Yen Gains Attention Ahead of BOJ Decision
Markets are also pricing in a high probability of a Bank of Japan rate increase on Friday. Sentiment toward the yen has begun to improve, with currency speculators moving to a net long position in the Japanese currency for the first time since February.
Elsewhere, the New Zealand dollar and Australian dollar each declined by about 0.1%, trading at $0.5769 and $0.7133 respectively.
The offshore Chinese yuan was little changed at 6.708 per dollar and remained close to its strongest level in more than three years as investors awaited China’s industrial production and retail sales figures.