The dollar maintained its strength at the week's highest levels as renewed fears of energy supply disruptions in the Middle East pushed up bond yields and oil prices. This surge in energy costs and producer prices in August increased the likelihood of a US rate hike. The US dollar index was flat at 99.09, after a 0.4% rise the previous day, while analysts noted the bond market stress was beginning to affect risk assets.
Oil prices, specifically Brent crude, dipped by 2% to $105 a barrel on Friday, after reaching nearly $110 on Thursday, its highest since May. Despite this, crude was still poised for a weekly gain of over 7.5%. The ongoing Middle East conflict is seen as keeping risks skewed towards higher oil prices, contributing to inflationary pressures.
Markets are keenly awaiting the release of US Consumer Price Index (CPI) data at 8:30 a.m. ET (1230 GMT), a critical data point before the Federal Reserve's meeting next week. Consumer prices are expected to have accelerated in August due to gasoline price rebounds. Fed funds futures are pricing in a roughly 70% probability of a 25-basis-point rate hike on September 16, an increase from about 60% a week prior. This sentiment is also reflected in the benchmark 10-year US Treasury yield, which approached the 5% level, and the 2-year yield hitting a 14-month peak of 4.5961%.
Analysts from JPMorgan anticipate that eight out of nine developed-market central banks, including the Fed, will implement interest rate hikes by year-end. ING strategists believe that even a modest upside surprise in the CPI data could be enough to solidify expectations for a September rate hike, particularly given the recent 15% rally in oil prices since August. Despite the global bond selloff, the dollar has shown resilience, with ING suggesting the DXY 100.0 is becoming a more realistic target for the currency.
