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The dollar rose slightly near its highest level in two weeks on Tuesday, after rising oil prices increased Treasury yields and boosted expectations that the Federal Reserve (the US central bank) will raise interest rates this week.
The dollar also received additional support as risk appetite declined following a drop in stock markets, with AI-linked stocks under pressure after sector leaders called for a slowdown in development to contain potential threats to humanity.
Markets currently expect the Federal Reserve to raise interest rates on Wednesday to be almost certain, with the CME Group's FedWatch tool indicating a nearly 93% probability of a rate hike, which would be the first of its kind in over three years.
Christopher Wong, a foreign exchange analyst at OCBC, said in a note, "A combination of factors, including rising oil prices, rising US bond yields, and declining risk appetite, generally helped the dollar rise."
He added that near-term support may continue, but any further rise in the dollar will likely require the Federal Reserve to keep the door open for further monetary tightening.
The dollar index, which measures the value of the US currency against a basket of six major currencies, reached 99.55 in the latest trading.
The euro fell slightly against the dollar to $1.1538, and the British pound to $1.3494.
The yen fell from its highest level in seven months, closing down about 0.2% at 154.72 to the dollar, ahead of the expected interest rate hike by the Bank of Japan on Friday.
Oil prices rose to $107 per barrel, trading near their highest level in four months, after Iran-aligned Houthis in Yemen launched an attack on Saudi Arabia and postponed talks between Gulf countries and Iran.
This raised inflation fears and pushed the benchmark 10-year US Treasury yields to breach the important psychological level of 5% for the first time since October 2023 in the previous session. The last trading price for the yield was 4.9895%.
This inflationary pressure follows a stronger-than-expected jobs report and a rise in consumer prices for August, which reinforced the market's belief that the Federal Reserve will raise interest rates on Wednesday.
The New Zealand and Australian dollars each fell by about 0.1%, with the former settling at $0.5769 and the latter at $0.7133.
The yuan stabilized in offshore trading at 6.708 against the dollar, hovering near its highest level in over three years, as markets await industrial production and retail sales data later in the day.
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