U.S. dollar rises to near two-week high

The U.S. dollar index was up 0.3% to 99.39, its highest level since September 2

The U.S. dollar surged to a near two-week high on Monday, as the odds of the central bank delivering an interest rate hike this week surged to nearly 95%.

At 20:59 GMT, the U.S. dollar index was up 0.3% to 99.39, its highest level since September 2.

Currency market participants are focused on Wednesday’s central bank decision, in what could be one of the most consequential move on rates in years. Key U.S. consumer and producer inflation data last week tipped the scales towards a quarter-point rate hike, coming after an August nonfarm payrolls report.

Additionally, a relentless rout in the U.S. bond market has boosted yields to multi-year highs and driven up borrowing costs, further compounding the outlook for monetary policy tightening. The benchmark U.S. 10-year yield briefly hit 5% on Monday for the first time since October 2023.

According to the CME FedWatch tool, the chances of a hike now stand at 92.5%, up from 87.3% a day ago and 59.4% a week ago. Higher rate environments tend to lift the dollar.

If the central bank were to hike, it would be the first since July 2023.

A surge in oil prices recently have also played a part in firming expectations for the hike. Crude benchmarks have surged around 20% over the last two weeks amid a resurgence in strikes between Iran and U.S. and a widening conflict between Saudi Arabia and Houthis in Yemen.

In our view, the case for a rate hike is strong, Deutsche Bank analysts led by Matthew Luzzetti said on Friday.

Growth remains solid, the labour market has rebounded and is showing some signs of tightening, and PCE inflation has demonstrated limited evidence of falling back towards target. Forward-looking indicators, including from energy prices, suggest the inflation overshoot is likely to persist for some time. Against this backdrop, it is not clear the Fed is sufficiently restrictive, they said.

In response to recent developments, we have added a third 25bp hike to our outlook – we now expect the Fed to deliver 75bps of tightening in total, with 25bp increases in September, December and next March. This action would unwind the risk management rate cuts the Fed delivered last year, they added.