The US dollar hit a seven-week high on Sept 2 as investors turned to the US currency amid growing concerns about the economic impact of the energy shock and weighed diverging monetary policy paths across major economies.
The US and Iran found themselves back on a war footing on Sept 2 after the most significant exchange of fire in weeks.
The greenback tends to benefit from higher oil prices because the US economy is less exposed to energy shocks than many other major economies, attracting demand at the expense of currencies such as the euro and yen.
While most economists expect the European Central Bank to be near the end of its tightening cycle after next week’s widely anticipated rate hike, the Federal Reserve is confronting a growing risk of having to tighten policy in 2027.
“We expect the ECB to finish its hiking cycle by the end of the year, while the Federal Reserve will likely be just beginning to raise rates,” George Brown, senior economist at Schroders, said.
“That should widen rate differentials in favour of the dollar and lead to a weaker euro by year,” he added, flagging Schroders is positioned for a weaker euro and expects the single currency to fall to US$1.10 against the dollar by year-end.
However, a sell-off in US Treasuries driven by concerns about inflation and the country’s fiscal trajectory can weigh on the dollar, as rising debt levels and persistent price pressures raise doubts about the long-term appeal of US assets.
The US dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.11 per cent to 99.76, after reaching 99.808, its highest point since Aug 17.
The euro was down 0.16 per cent at US$1.1575, after hitting US$1.1570, its lowest since Aug 20.
The yield on the benchmark US 10-year note rose to as high as 4.812 per cent, its firmest since November 2023, before retreating to 4.804 per cent.
Japan’s benchmark 10-year yield extended its rally to 3.01 per cent on Sept 2 after reaching a three-decade milestone of 3 per cent on Sept 2.
Markets are now pricing in a 70 per cent chance of a September Fed hike, up from around 40 per cent a week earlier, according to CME Group’s FedWatch tool.
Dollar eases below 160 yen
The Japanese yen rose 0.45 per cent against the greenback to 159.50 per US dollar, after weakening to its lowest since July 31.
It was right above the psychologically important 160-per-dollar threshold as markets weigh the Bank of Japan’s rate path.
BOJ governor Kazuo Ueda said consecutive rate hikes could be a possibility.
US Treasury Secretary Scott Bessent voiced strong support for “decisive” monetary steps to combat yen weakness in a meeting with Ueda, the Treasury Department said.
A rare joint intervention by the US and Japan at the end of July provided short-lived relief for the fragile yen, pulling it away from the 40-year low of 163.99, but the currency has since surrendered around half of the gains from the joint action.
“There appears little chance of another round of actual co-ordinated intervention until there is some de-escalation in the Strait of Hormuz that takes heat out of the oil price,” said Tony Sycamore, a market analyst at IG, in a note.
The New Zealand dollar slumped 1.01 per cent against the greenback to US$0.5844, its lowest point since Aug 13, even after the country’s central bank raised its official cash rate by 25 basis points to 2.75 per cent.
Analysts said market participants viewed the decision as less hawkish than expected. REUTERS
