Dollar Soars on Energy Shock Concerns and Rate Path Divergence

The US dollar reached its highest point in seven weeks due to growing concerns about the economic impact of the energy shock and diverging monetary policy paths across major economies. The currency tends to benefit from higher oil prices, as the US economy is less exposed to energy shocks than many other major economies.

According to George Brown, senior economist at Schroders, most economists expect the European Central Bank to be near the end of its tightening cycle after next week's widely anticipated rate hike. However, the Federal Reserve is confronting a growing risk of having to tighten policy in 2027, which could widen rate differentials in favor of the dollar and lead to a weaker euro by year-end.

The US dollar index rose 0.11% to 99.76, while the euro was down 0.16% at $1.1575. Japan's benchmark 10-year yield extended its rally to 3.01%, and markets are now pricing in a 70% chance of a September Fed hike, up from around 40% a week earlier.