Key facts
- The dollar index held above 100 on Tuesday.
- Brent crude oil prices fell to a two-week low after Iran's proposal regarding the Strait of Hormuz.
- Federal Reserve officials Goolsbee and Musalem made hawkish comments, reinforcing expectations of further rate hikes.
- US 2-year Treasury yields remained stable, reflecting conviction in the Fed's policy path.
- USD/CAD pushed above 1.40 due to wider US-Canada yield spreads.
The dollar showed resilience on Tuesday, trading slightly higher and holding above the 100 handle, as investors navigated a decline in oil prices against the backdrop of potential further Federal Reserve rate hikes. Brent crude fell below $100 a barrel after Iran's proposal to reopen the Strait of Hormuz and confirmation of Saudi Arabia redirecting oil traffic. Ordinarily, such a drop in oil prices coupled with a rally in equities would weigh on the dollar, but hawkish commentary from Federal Reserve officials provided a strong counter-balance.
Chicago Fed President Austan Goolsbee indicated that persistent inflation could result from supply shocks, strong spending, and AI-related investments, suggesting the path back to 2% inflation may not be painless. St. Louis Fed President Alberto Musalem reinforced this hawkish stance, stating that policy remains accommodative and gradual tightening is preferable. These remarks supported front-end US Treasury yields, with the 2-year yield holding firm at 4.74% while the 10-year yield dipped to 4.95%. This stability in yields, driven by expectations of the Fed's continued policy tightening, anchored the dollar.
The USD/CAD pair pushed above 1.40 for the first time since early August, primarily due to a significant yield advantage in US 2-year Treasuries over Canadian debt. Despite a hawkish speech from Bank of Canada Governor Tiff Macklem, which suggested the October meeting was a live decision if inflation remains sticky, the Canadian dollar weakened.
Geopolitical developments at the UN General Assembly in New York are being closely monitored for their potential impact on currency markets. A confirmed meeting between President Trump and Iranian President Pezeshkian could act as a dollar-negative catalyst by deflating energy prices and softening Fed hike expectations. Conversely, a failure of diplomatic efforts could maintain support for the dollar above the 100 level.