US Dollar Hits Two-Week High as Fed Rate Hike Bets Solidify

The U.S. dollar strengthened to a nearly two-week high on Monday as traders priced in a near-certain interest rate hike from the Federal Reserve this week, a move fueled by persistent inflation data and rising energy prices.

Market Reaction

The U.S. Dollar Index (DXY), which measures the greenback against a basket of six major currencies, climbed 0.55% to 99.55, rebounding sharply after two consecutive weeks of modest declines. The rally put pressure on other major currencies:

• The euro (EUR/USD) fell 0.5% to a nearly two-week low of $1.1500 as investors balanced the European Central Bank's recent rate hike against renewed dollar momentum and Eurozone stagflation risks.
• The Japanese yen (USD/JPY) weakened, with the dollar rising 0.65% to 154.55. The move marked a consolidation for the yen, which remains near a seven-month high reached last week.

Fed Hike Expectations Firm Up

Expectations for Fed tightening have solidified ahead of its policy decision on Wednesday. According to the CME FedWatch Tool, financial markets are now pricing in an 86% probability of a 25-basis-point rate increase at the September 15-16 meeting.

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This repricing follows last Friday's U.S. Consumer Price Index report, which showed headline inflation holding at 3.4% and core CPI rising 0.3% month-over-month. The data briefly pushed the 10-year Treasury yield above the 5% mark, and swap markets now suggest traders are betting on an additional Fed hike in December.

A Pivotal Week for Central Banks

This week is critical for global currency markets, with monetary policy announcements from the Federal Reserve, the Bank of England (Thursday), and the Bank of Japan (Friday). The Bank of Japan is widely expected to raise its policy rate by 25 basis points to 1.25% as it continues to normalize policy.

Adding to the hawkish sentiment, Brent crude oil prices rose another 3% on Monday to approach $112 per barrel. The spike came amid reports of new attacks on Saudi Arabian pipeline infrastructure, heightening concerns about supply constraints and further inflationary pressures.