Dollar Hits One-Week High as Fed Rate Hike Bets Surge to 92%

The U.S. dollar climbed to its highest level in over a week on Tuesday, as surging Treasury yields and rising oil prices bolstered market expectations for an imminent interest rate hike from the Federal Reserve.

Key Drivers for Dollar Strength

The U.S. Dollar Index (DXY), which measures the greenback against a basket of six major currencies, rose by 0.24% to trade around 99.60, according to data from Investing.com. The rally is underpinned by a dramatic shift in interest rate expectations ahead of the Federal Reserve's policy meeting this week.

According to the CME FedWatch Tool, the probability of the Federal Reserve raising its benchmark rate by 25 basis points to a range of 3.75%-4.00% on Wednesday has jumped to 92.1%, up significantly from around 60% last week. Adding to the dollar's appeal, the benchmark 10-year U.S. Treasury yield crossed the 5% threshold for the first time since 2007. This move was partly fueled by rising energy prices, with Brent crude oil surpassing $113 a barrel amid new geopolitical tensions, stoking inflation concerns.

Euro and Yen Under Pressure

The dollar's advance has put significant pressure on other major currencies. The euro fell to a one-month low, declining 0.1% to approximately $1.1539. Traders are weighing the risk of stagflation in the Eurozone against the dollar's momentum, even after the European Central Bank raised its own borrowing costs last week.

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The Japanese yen also weakened, falling 0.3% to a one-week low of 154.82 per dollar. The currency has retreated from a seven-month high reached last week as investors await the Bank of Japan's monetary policy decision on Friday.

Central Banks Take Center Stage

This week's foreign exchange market activity is dominated by upcoming policy meetings, with the Federal Open Market Committee (FOMC) and the Bank of Japan taking the spotlight. Analysts at DBS Bank noted that "the market is pricing in a Fed rate hike cycle, while at the same time, rising energy input costs are threatening to exacerbate second-round inflation effects."

However, the analysts also advised caution on chasing the dollar rally before the FOMC announcement, noting that some Fed officials had signaled a willingness to pause hikes before the pre-meeting blackout period began. In Japan, while a rate hike is widely anticipated, investors remain divided on whether the central bank will signal a more aggressive tightening path ahead.