Dollar slips to 98.73 as oil shock lifts global yields

The dollar index eased to 98.73, giving up earlier gains. This move occurred despite Brent crude futures holding above $100 per barrel. The energy spike pushed global bond yields to their highest levels since 2023. Investors reacted to escalating tensions in the Middle East. These events threatened energy supply routes from the region. The market response was muted for the greenback. The currency found limited support against major peers.

According to GN markets/inflation (en-US), the dollar's weakness defied traditional safe-haven logic. The euro rose to $1.1639. Sterling climbed to $1.3555. The Japanese yen strengthened to 153.35. This level is near a seven-month high. The yen gained roughly 0.1% in trading. These moves reflect shifting expectations on central bank policies. The US Treasury buyback program also failed to boost the dollar.

Oil prices drive yield increases

Brent crude remained firmly above $100 after breaching that level on Wednesday. Iran and the US engaged in significant attacks on shipping. These actions disrupted energy supplies from the Middle East. Fresh inflation pressure lifted global bond yields. The 10-year US Treasury yield hit its highest point since 2023. A disappointing buyback program for longer-dated bonds contributed to the rise. Markets are showing less sensitivity to oil shocks over time. This desensitization affects how traders price in energy risks.

Richard Franulovich of Westpac Institutional Bank noted the unusual dollar performance. He stated that safe-haven hedging usually supports the dollar. However, the currency has not traded firmer as expected. Debasing trades and central bank tightening are dragging on the dollar. A more interventionist Treasury Department also plays a role. These background factors are washing through the market. The dynamic contrasts with typical crisis responses. Investors are reassessing the dollar's role in global portfolios.

Central banks prepare rate hikes

The European Central Bank is set to raise rates for the second time this year. The move is expected to signal readiness for further tightening. The Bank of Japan is expected to hike rates to 1.25% on September 18. A subsequent increase to 1.75% is anticipated in the second quarter of 2027. This timeline is earlier than previously thought. Persistent price pressures and yen weakness drive these decisions. Central banks are responding to broadening inflation concerns. Policy shifts will impact global capital flows.

Market focus turns to US inflation data. Producer prices are due later on Thursday. Consumer price index data releases on Friday. These are the last key releases before the FOMC meeting. The Federal Open Market Committee meets on September 15 to 16. Traders price a roughly 60% chance of a Fed rate hike. This probability rose after stronger-than-expected nonfarm payrolls data. The US labor market remains robust. Inflation data will determine the Fed's next move.

Market expectations shift on policy

Investors weigh the impact of oil shocks on inflation. The duration of the conflict affects market sensitivity. Global central bank tightening continues to pressure currencies. The US Treasury's interventionist stance adds to the complexity. The dollar's performance reflects these multiple forces. The euro and sterling gains indicate relative strength. The yen's rise anticipates the Bank of Japan's hike. Currency markets remain subdued but active. Future data will clarify the policy path.