Dollar Rallies as Fed Rate Hikes Gain Traction

The US dollar has pulled back slightly due to a pause in the bond sell-off and a retreat in oil prices. However, the greenback remains strong as investors believe that rising Fed rates are slowing the economy less than in the past, making it more difficult to bring inflation back to the 2% target.

The futures market is pricing in a 70% probability of a Fed rate rise in October, compared with a 50% chance for the ECB. Investors are gradually coming round to this view, which is laying a solid foundation for the US dollar's rise.

The pullback in Treasury yields and the US dollar has allowed the bears on USDJPY to launch a counterattack. This is partly due to concerns about the weakening of the yen expressed by Donald Trump during his meeting with Sanae Takaichi, which heightens the risk of another coordinated currency intervention.