Dollar Surges as Oil Prices Hit Four-Month High, Fueling Expectations for Fed Rate Hike

The US dollar strengthened on Tuesday, nearing its two-week high as oil prices surged to a four-month peak. This push contributed to rising Treasury yields, which hit their highest level since 2007 at 5.0266%. The benchmark U.S. 10-year Treasury yield's climb fueled expectations for a Federal Reserve rate hike this week.

Markets now see the Fed hike on Wednesday as almost certain, with CME's FedWatch tool pricing in a roughly 93% chance of an interest-rate increase. 'The combination of higher oil, higher U.S. yields and weaker risk appetite helped lift the U.S. dollar broadly,' said Christopher Wong, an FX analyst at OCBC.

The euro hovered near its one-month low at $1.1535 due to broad greenback strength, while sterling was 0.1% weaker at $1.3485. The yen also pulled away from a seven-month high, standing down roughly 0.4% at 154.91 ahead of an expected Bank of Japan rate hike on Friday.

Analysts at BCA noted that 'limited hawkishness from here argues for curve steepeners and limited USD upside.' Markets are almost certain to see the Bank of Japan raise rates on Friday, shifting market sentiment on the yen to a net long position for the first time since February.