The dollar jumped on Thursday, positioning itself for its best week in a month. This surge was primarily fueled by escalating oil prices, with Brent crude surpassing $100 a barrel, and heightened speculation that the Federal Reserve will raise interest rates. Traders are now fully pricing in a rate hike in September, with some even anticipating an increase as early as next week. The Bloomberg Dollar Spot Index rose by 0.3%.
The renewed concerns over inflation stemmed from the Iran-backed Houthis claiming their first attack on commercial ships in recent months. President Donald Trump has stated he will hold Iran responsible for further attacks, exacerbating geopolitical tensions. These developments pushed yields on benchmark 10-year Treasuries to a year-to-date peak, exceeding 4.7%, while 30-year yields remained above 5%. Nathan Thooft, a senior portfolio manager at Manulife Investment Management, noted that interest-rate differentials are moving in the dollar's favor due to investors leaning towards a "higher-for-longer Fed outlook," with geopolitical risk further amplifying this trend.
The dollar advanced against nearly all major peers, with the New Zealand dollar and Swiss franc underperforming significantly. The yen remained near a 40-year low against the dollar, trading at 163.80 per dollar, a situation prompting the U.S. Treasury Department to warn against excessive yen volatility and call for further interest rate hikes by the Bank of Japan. Marcus Jennings, a strategist at Wells Fargo, expressed a bullish outlook for the dollar over the next three months, citing the Fed's stance.
Adding to inflationary pressures, the Trump administration announced new tariffs of 10% and 12.5% on goods from 60 trading partners, coinciding with the expiration of a temporary 10% global tariff. This renewed trade war, alongside Middle East turmoil, is creating a "double whammy" of tariffs and supply disruptions, according to Vishnu Varathan, Mizuho's macro strategy for Asia. The CME FedWatch tool shows the odds of a Fed rate hike next week at 35.8%, a significant increase from 11.8% last week, indicating growing market anticipation of tighter monetary policy despite the Fed paring back its forward guidance.
