Dollar Hits Two-Week High as Traders Prepare for Expected Rate Hike

The U.S. dollar climbed to a two-week high on Tuesday (15th) as participants in the foreign exchange market prepared for a widely expected interest rate hike by the Federal Reserve (Fed), ahead of its upcoming monetary policy decision. U.S. Treasury yields surged, further pushing up borrowing costs, while oil prices continued their upward trend this week.

In New York trading, the U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, rose 0.3% to 99.66—the highest level since September 1.

According to the CME FedWatch tool, markets now assign a 94.5% probability to the Federal Open Market Committee (FOMC) announcing a 25-basis-point rate hike on Wednesday, up sharply from 59% just a week earlier. Generally, higher interest rates tend to strengthen the dollar.

The surge in rate hike expectations has been driven by several factors, including aggressive selling in the U.S. bond market, rising oil prices fueling inflation concerns, recent U.S. labor market and inflation data, and increasingly hawkish comments from Fed officials.

The yield on the 10-year U.S. Treasury note rose 4.7 basis points on Tuesday to 5.008%, the highest since April 2007. The 30-year Treasury yield also hit a more than 24-year high.

Another factor behind the U.S. bond sell-off is growing market concern over the impact of billions of dollars being invested in AI infrastructure and the continued expansion of U.S. fiscal debt.

Meanwhile, oil prices continued to climb on Tuesday. Brent crude futures rose 2.6% to $108.40 per barrel, while U.S. West Texas Intermediate (WTI) crude futures jumped 4.1% to $105.56 per barrel.

The latest oil price gains were triggered by reports of halted oil loading operations at a key Red Sea port in Saudi Arabia and the suspension of operations at three oil fields in Libya. These supply disruptions have deepened market concerns over crude oil supply.

Market focus now centers on whether the Fed will indeed announce its first rate hike in over three years. This comes amid pressure from President Trump urging Fed Chair Kevin Warsh to cut rates, as well as the upcoming U.S. midterm elections in November.

José Torres, Senior Economist at Interactive Brokers, said, "Markets are now fully prepared for tomorrow's rate hike. A rate increase can help lower inflation expectations by demonstrating the Fed's resolve to combat inflation above its target."

He believes that core inflation, excluding food and energy, remains modestly above 2%, making a modest 25-basis-point hike reasonable. This raises the question on Wall Street: could this be a 'one-and-done' hike?

Torres added that the rate hike could result in a flatter yield curve by the end of the day, as monetary discipline clashes with a reality—higher fuel costs have not yet clearly translated into broader economic price pressures.

This explains why there remains a gap of about 100 basis points between overall consumer inflation and core consumer inflation: overall inflation stands at 3.4%, while core inflation is at 2.4%.

Torres also noted that for investors bullish on the dollar or other assets, another factor to watch is that higher oil prices this year could create a favorable base effect for 2027.

In other words, if oil prices remain high this year, year-over-year growth rates next year may be easier to moderate, helping Chair Warsh and his team achieve the 2% inflation target.

On the other hand, the yen retreated further from recent highs, dipping to a one-week low of 155.12 yen per dollar on Tuesday, extending its recent pullback.

The yen had risen to 152.89 per dollar last week—its highest in seven months—but is now retreating as markets await the Bank of Japan's (BoJ) expected rate hike on Friday.

The euro hovered near a one-month low.

The euro fell 0.1% against the dollar to 1 euro = 1.1540 dollars.

Forex traders continue to assess the risk of 'stagflation' in the eurozone and the pressure from a hawkish dollar.

The European Central Bank (ECB) raised borrowing costs by 25 basis points to 2.50% last week.

As of approximately 5:40 a.m. Taiwan time on Wednesday (16th):

DXY: 99.6463 (+0.0128%) EUR/USD: 1.1535 (-0.0520%) GBP/USD: 1.3470 (-0.0519%) AUD/USD: 0.7125 (-0.0841%) USD/CAD: 1.3917 (-0.0216%) USD/JPY: 155.0900 (-0.0129%)