Dollar Firms Ahead of Fed, BOJ Decisions Amid Oil Price Surge

The US dollar has strengthened ahead of key decisions from the Federal Reserve and Bank of Japan. The yen's recent rally is losing steam, hovering near a seven-month high as investors weigh potential rate hikes.

Global policymakers are grappling with inflation pressures due to rising oil prices, which have surpassed $100 per barrel following Middle East tensions. Last week, the European Central Bank raised interest rates and warned of further increases, setting the stage for this week's decisions from the Fed and BOJ.

The CME FedWatch tool indicates an 86% chance of a US rate hike this week, with another move expected later in the year. Kieran Williams, head of Asia FX at Intouch Capital Markets, notes that markets are heavily conditioned for a hawkish week, making it more likely that the bigger surprise will be a central bank failing to validate current pricing.

The euro has softened 0.28% against the dollar, while sterling is down slightly. US Treasury yields remain near multi-year highs, with the 2-year yield inching away from its two-year high of 4.61%. Strategists at Commonwealth Bank of Australia warn that Fed Chair Kevin Warsh's credibility may be undermined if he fails to match his tough rhetoric with policy action.

Meanwhile, Brent crude futures have risen 2% to $106.7 per barrel as concerns over supply grow following new attacks on Saudi Arabia and Iranian ships in the Gulf.