Key facts
- The dollar strengthened on Tuesday, reaching multi-month highs against major currencies.
- Elevated oil prices and rising Treasury yields are underpinning the dollar's strength.
- The euro fell to a three-month low of $1.13325.
- The Federal Reserve is expected to implement further rate hikes.
- Markets are pricing in a greater than 70% chance of a Fed rate hike by the end of October.
The dollar continued its ascent on Tuesday, reaching multi-month highs against a basket of major currencies. This strength is attributed to a confluence of factors including volatile oil prices and a rapid increase in U.S. Treasury yields.
The euro experienced a significant decline, dropping as much as 0.32% to $1.13325, a three-month low. This weakness is linked to Europe's ongoing struggle with a global energy shock and increasing political risks within the region. The pound also weakened, falling 0.25% to $1.3221, nearing its own three-month lows, while the Swiss franc touched a four-month soft spot at 0.8335 per dollar.
Beyond domestic European concerns, the broader strengthening of the dollar is supported by elevated oil prices and a robust U.S. economy, which are leading markets to anticipate further rate hikes from the Federal Reserve. This expectation has driven Treasury yields higher across the curve, with the two-year yield nearing the significant 5% level.
Morgan Stanley has revised its outlook, now forecasting dollar strength through year-end and into 2027, citing widening rate differentials between the U.S. and the rest of the world, strong U.S. growth, and European risk premiums. In contrast, European Central Bank President Christine Lagarde has tempered market expectations for aggressive ECB rate hikes.
Key U.S. economic data, including the PCE price index and nonfarm payrolls, are due this week and will be closely watched for further indications of the Federal Reserve's policy path. Markets currently assign a greater than 70% probability to a Fed rate hike at the end of October.
Meanwhile, the Australian dollar's performance served as a cautionary tale. Despite the Reserve Bank of Australia raising its cash rate to a 15-year high of 4.60%, the Aussie depreciated, falling 0.44% to $0.6988. Analysts suggested this was due to comments from the RBA governor indicating that a rate hold was considered, leading markets to reassess expectations for further tightening.