Dollar Soars on Energy Shocks and Diverging Central Banks

The US dollar has reached a seven-week high due to growing concerns about the economic impact of the energy shock and diverging monetary policy paths across major economies. The U.S. and Iran's recent exchange of fire has added to market uncertainty, with investors seeking safe-haven assets like the greenback. As a result, the dollar index rose 0.11% to 99.76, its highest point since August 17.

The euro fell 0.16% against the dollar to $1.1575, hitting its lowest level since August 20. Meanwhile, Japan's benchmark 10-year yield extended its rally to 3.01%, reaching a three-decade milestone of 3% on Tuesday. Markets are now pricing in a 70% chance of a September Fed hike, up from around 40% a week earlier.

George Brown, senior economist at Schroders, expects the European Central Bank to finish its hiking cycle by the end of the year, while the Federal Reserve will likely be just beginning to raise rates. This should widen rate differentials in favor of the dollar and lead to a weaker euro by year-end, according to Brown.

However, rising debt levels and persistent price pressures in the US could weigh on the dollar's appeal, potentially driving it lower. The rare joint intervention by the U.S. and Japan at the end of July provided short-lived relief for the fragile yen, but the currency has since surrendered around half of its gains.