Oil Rebound Fuels Inflation Concerns and Dollar Strength
The recent rebound in West Texas Intermediate crude oil prices has sparked concerns about inflation and is contributing to the strengthening of the US dollar. According to Fiona Cincotta, StoneX Senior Market Analyst, this rebound is feeding into U.S. inflation concerns and lifting Treasury yields, keeping the dollar at a two-month high.
The combination of rising oil prices and hawkish Federal Reserve signals has created a perfect storm for the dollar. The U.S. composite PMI reached its strongest level in over five years, increasing market-implied odds of an October Federal Reserve hike to 75% from 50%. This has pushed the 10-year Treasury yield to fresh 19-year highs.
Meanwhile, the Japanese yen has weakened more than 3% in two weeks despite a Bank of Japan rate hike to a 31-year high. Governor Kazuo Ueda's failure to convince markets that the Bank of Japan is aggressively looking to hike rates further has led to this decline.