Dollar Surges as Oil Prices Reach Four-Month Peak

The US dollar has reached a two-week high due to rising oil prices and increased expectations of an interest rate hike by the Federal Reserve this week. The FedWatch tool, which measures probabilities of an interest rate increase, currently shows a roughly 93% chance of a hike on Wednesday, making it a near certainty.

This surge in dollar value is also attributed to higher US Treasury yields and weaker risk appetite in the market, following recent stock market declines. Christopher Wong, FX analyst at OCBC, noted that 'the combination of higher oil, higher U.S. yields and weaker risk appetite helped lift the U.S. dollar broadly.'

Crude oil prices have climbed to $107 a barrel, near a four-month peak, due to recent events in Yemen and Gulf-Iran talks being postponed. This has added to inflation concerns, with the benchmark 10-year Treasury yield breaching 5% for the first time since October 2023.

The overall market consensus is that the Fed will raise rates on Wednesday, and at least one more hike by the end of March. However, analysts at BCA suggest that 'limited hawkishness from here argues for curve steepeners and limited USD upside.'