The dollar is on track for its strongest weekly performance in a month, with the Bloomberg Dollar Spot Index rising 0.3%. This surge is largely attributed to escalating geopolitical uncertainty, particularly the intensifying conflict in the Middle East, including new Houthi attacks on commercial ships and warnings from former President Donald Trump regarding Iran. This instability encourages investors to seek safety in the dollar, impacting cryptocurrencies and other risk assets negatively.
The dollar's rally is also fueled by a spike in oil prices, with Brent crude climbing above $100 a barrel after Houthi attacks on Saudi oil tankers, and renewed global trade tensions. The Trump administration's imminent imposition of new 10% and 12.5% tariffs on goods from 60 trading partners, coupled with the expiration of a temporary 10% global tariff, is exacerbating inflation concerns. These factors are driving up US Treasury yields, with the benchmark 10-year yield reaching an 18-month high above 4.7% and the 30-year yield exceeding 5%. Higher yields make dollar-denominated assets more attractive.
These inflationary pressures are leading traders to increase their bets on a Federal Reserve interest rate hike, with a September hike fully priced in and about a 35% chance of a quarter-point increase in July. Analysts like Nathan Thooft of Manulife Investment Management note that interest-rate differentials are moving in the dollar's favor, a trend exacerbated by geopolitical risks. Marcus Jennings, a strategist at Wells Fargo, remains bullish on the dollar for the next three months. The dollar has advanced against most major peers, with the New Zealand dollar and Swiss franc underperforming significantly, and the yen remaining near a 40-year low at 163.80 per dollar.
