Dollar Holds Ground as US Economy Resilience Boosts Fed Rate Hike Expectations

The US dollar index took a step back on Thursday as Treasury yields eased and oil prices retreated. Brent crude fell below $100 per barrel after reports that the US and Iran are exploring a phased deal to reopen the Strait of Hormuz. The decline in yields and oil prices was expected, given their record correlation.

However, despite the pullback, the dollar remains strong, with futures markets pricing in a 70% chance of a Fed rate hike in October. This is higher than the 50% probability for the ECB, which has led some investors to believe that rising rates are not slowing down the US economy as much as they did in the past.

This shift in sentiment means that bringing inflation back to 2% will be more difficult, requiring a more aggressive or prolonged tightening cycle. Derivatives markets now indicate a 50% chance of a 100-basis-point rate hike over the next 12 months, up from a 75-basis-point increase previously.

The pullback in Treasury yields and the dollar has allowed bears on USDJPY to launch a counterattack, particularly after US President Donald Trump expressed concern about the weakening yen. This raises the risk of another coordinated currency intervention by Washington and Tokyo, keeping speculators on edge.