Dollar Surges Amid Energy Shock Fears, Rate Differentials

The US dollar has reached its highest point in two weeks as investors increasingly turn to the currency due to growing concerns about the economic impact of the energy shock. The conflict between Iran and its Arab neighbors, which erupted into war on Wednesday, is exacerbating fears about global economic stability.

According to economists, the greenback tends to benefit from higher oil prices because the US economy is less exposed to energy shocks than many other major economies, attracting demand at the expense of currencies such as the euro and yen. The dollar's rise was also driven by diverging monetary policy paths across major economies, with the European Central Bank nearing the end of its tightening cycle and the Federal Reserve facing growing risks of having to tighten policy in 2027.

George Brown, senior economist at Schroders, expects the ECB to finish its hiking cycle by the end of the year while the Fed will likely begin raising rates. This should widen rate differentials in favor of the dollar and lead to a weaker euro, he said. However, rising debt levels and persistent price pressures can weigh on the dollar.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.20% to 99.865, its highest point since August 17. The euro was down 0.16% at $1.1575, while the yield on the benchmark 10-year Treasury note reached as high as 4.8182%, its firmest since November 2023.