US Dollar Strengthens as Energy Prices Fuel Fed Hike Expectations

The US dollar is gaining strength due to rising energy prices and market expectations for further Federal Reserve tightening. According to MUFG's Lee Hardman, the 2-year US Treasury yield has reached a year-to-date high of 4.41%, supporting the dollar.

Market expectations for a September Fed hike have increased, with 17bps priced in for the 16th FOMC meeting. However, policy risk premium and buyback-related debasement fears are seen as offsetting factors that could weaken the dollar's gains.

Fed Governor Michael Barr stated that if inflation moderates sufficiently, the Fed can take more time to assess its policy stance. However, if inflation does not moderate, rates should be raised decisively.