Dollar Rallies on Elevated Fed Hike Bets Amid Middle East Uncertainty

The US dollar continued its upward trend on Monday and Tuesday, driven by rising Treasury yields and increased expectations that the Federal Reserve may raise interest rates multiple times in the coming months.

Investors remained concerned about inflation risks due to ongoing tensions with Iran, which kept Fed rate hike bets elevated. The probability of a back-to-back rate hike in October is now 73%, with another hike fully priced in by January and around 95bps worth of additional increases expected by the end of 2027.

The Reserve Bank of Australia also raised its cash rate for the fourth time this year, taking it to its highest level in 15 years. Policymakers cited persistently elevated inflation and growing upside risks amid the conflict in the Middle East as reasons for the decision.