Dollar Soars on Oil Prices and Rate Hikes

The US dollar continued its upward trend on Tuesday (Sep 29), reaching new highs against major peers due to volatile oil prices and rising US Treasury yields. The euro fell by as much as 0.32 per cent to $1.13325, a three-month low, while the pound dropped 0.25 per cent to $1.3221. The Swiss franc was also weaker at 0.8335 per dollar, its softest in four months.

The greenback's strength is attributed to markets pricing in meaningful rate hikes by the US Federal Reserve, driven by a storming economy and elevated oil prices. Brent crude futures stood at $104.5 a barrel on Tuesday. The two-year Treasury yield, a key indicator for currencies, was around its highest in two years and closing in on the symbolic 5 per cent level.

Morgan Stanley's global head of FX, James Lord, forecasts US dollar strength through year-end and into 2027. He expects the euro to fall to $1.10 by mid-2027 due to widening rate differentials between the US and the rest of the world, robust US growth, and European risk premiums.

The dollar's next test is this week's key US data releases, including the personal consumption expenditures price index on Wednesday and non-farm payrolls on Friday. Markets now see a more than 70 per cent chance of a rate hike by the Fed at the end of October.