The U.S. dollar climbed to a two-week high on Monday, primarily driven by rising oil prices stemming from intensified conflict in the Middle East, which pushed investors towards the safe-haven currency. This surge also weighed on the yen. The U.S. dollar index, measuring the greenback against six major currencies, was up almost 0.5% to 99.59, marking its highest level since September 2. Brent crude futures rose nearly 3% to $107.6 per barrel, unsettling investors and sending global bond yields higher.
Simultaneously, the yield on the U.S. 10-year Treasury note edged up to 4.99% on Monday, its highest since 2007, and approached the 5% mark. This increase was fueled by expectations that surging oil prices would exacerbate inflationary pressures, thus strengthening the case for further Federal Reserve tightening. Money markets on Monday indicated a roughly 90% chance of a Fed rate hike this week, an increase from about 60% a week prior, according to CME Group's FedWatch tool. Analysts like Lee Hardman from MUFG noted that the dollar's modest strengthening was encouraged by these building expectations.
The bond selloff has driven key Treasury yields close to 5%, raising concerns about higher borrowing costs impacting the U.S. economy. The benchmark 10-year yield reached 4.97% by the end of last week, just below its peak in October 2023. This recent rout has increased the pressure on Federal Reserve Chairman Kevin Warsh ahead of the central bank's meeting on Wednesday. The market's stabilization on Friday followed data showing a stronger-than-expected rise in consumer prices last month, reinforcing speculation that policymakers would begin raising interest rates to control inflation that has exceeded its target for five years. Tracy Chen, a portfolio manager at Brandywine Global Asset Management, believes the Fed is behind the curve and that yields will head beyond 5% in the medium term, partly due to uncontrollable factors like the inflationary impact of the Iran war.
