The Fed's Hawkishness Leads to a Stronger Dollar
The US dollar index strengthened to the 101.1–101.2 range on Thursday (July 23rd), hovering around its highest level in three weeks. The dollar's strength was driven by surging oil prices and escalating geopolitical tensions in the Middle East, which have rekindled concerns that inflationary pressures could force the Federal Reserve to maintain a tight monetary policy.
Brent oil prices were seen hovering around US$100.66 per barrel, up around 7%, while West Texas Intermediate (WTI) traded at around US$91.65 per barrel, up more than 5%. Brent re-penetrated the psychological US$100 barrier after the Iran-backed Houthi group claimed attacks on two Saudi Arabian oil tankers in the Red Sea.
The attacks heightened concerns that energy shipping disruptions would not only affect the Strait of Hormuz but could also extend to the Bab el-Mandeb and Red Sea waterways. These waterways are crucial routes for transporting oil from the Gulf region to Europe and global markets.
The market is now pricing in a more than 33% chance that the Fed will raise interest rates at its meeting next week. The probability of a rate hike in September has also risen to more than 78%, compared to around 61% the day before.
These rising expectations have also boosted US Treasury yields. The 10-year bond yield rose to around 4.71%, its highest level since January 2025, while the two-year yield hovered around 4.37%.
Oil prices have now risen nearly 31% compared to their pre-conflict levels at the beginning of the month. Although broad inflationary pressures remain relatively contained, rising energy costs have the potential to increase the costs of gasoline, transportation, production, and distribution of goods.
If rising energy prices begin to spread to inflation in goods and services, the Fed could keep interest rates high for longer or raise borrowing costs again. This prospect is a major factor supporting the US dollar.
The dollar also strengthened against a basket of major currencies. The euro weakened to around US$1.1403 after the European Central Bank maintained its benchmark interest rates, including the deposit rate, at 2.25%. The ECB remains open to further interest rate hikes if energy prices further intensify inflationary pressures.
Against the yen, the dollar briefly reached around 163.45 yen, its strongest level in nearly four decades. The yen's weakening occurred because Japan is heavily dependent on energy imports, so a surge in oil prices has the potential to increase pressure on the trade balance and domestic inflation.
Meanwhile, the pound sterling hovered around US$1.338. The British currency remained relatively stable, but faced pressure from a strengthening dollar and concerns that rising oil prices could again drive up UK inflation.
In the short term, the dollar still has the potential to maintain its strength as long as oil prices remain high, Treasury yields continue to rise, and the market increases the likelihood of a Fed rate hike. However, its future direction will depend heavily on developments in the US-Iran conflict, oil movements, US inflation data, and the Fed's message at next week's meeting. (arl)
Source: Newsmaker.id
