Dollar Rallies as Oil Surge Revives Rate-Hike Bets Amid US-Iran Tensions
The US dollar strengthened against most major currencies this week due to escalating tensions between the United States and Iran, which led to the exchange of strikes. Oil prices surged with West Texas Intermediate crude rising as much as 10% to above $90 a barrel amid fears of supply disruption caused by the prolonged closure of the Strait of Hormuz.
The jump in energy prices fueled concerns that inflation could accelerate sharply, strengthening expectations that the US Federal Reserve may need to raise interest rates when it meets later this month. Hawkish comments from Fed Chair Kevin Warsh at the Jackson Hole economic symposium also played a significant role, with federal funds futures putting the probability of a September rate increase at 60%, and investors pricing in a cumulative 60 basis points of rate rises by the end of 2027.
Investors will have more data to assess before the Federal Open Market Committee’s next decision on 11 September, including August consumer price inflation figures. A strong Treasury intervention combined with consumer price data showing inflation easing could put pressure on the dollar and push expectations of a September rate rise lower again.