Key facts
- The U.S. dollar index reached a two-week high.
- Brent crude oil prices hovered near a four-month peak at $107 a barrel.
- Global stock markets declined amid concerns over AI development.
- The Federal Reserve is widely expected to raise interest rates by 25 basis points on Wednesday.
- Benchmark 10-year Treasury yields surpassed 5% for the first time since October 2023.
- AI industry leaders called for a slowdown in advanced AI development due to safety concerns.
The U.S. dollar edged higher on Tuesday, trading near a two-week peak as surging oil prices boosted Treasury yields and reinforced expectations of a Federal Reserve interest rate hike this week. The greenback also found support as risk appetite weakened, with stock markets tumbling and AI-related shares facing pressure after industry leaders urged a slowdown in development to mitigate potential threats to humanity.
Markets are pricing in a near certainty of a Fed rate increase on Wednesday, with CME's FedWatch tool indicating a roughly 93% chance of a 25 basis point hike. Christopher Wong, FX analyst at OCBC, noted that the combination of higher oil prices, rising U.S. yields, and weaker risk appetite broadly supported the dollar. He suggested further dollar upside would likely depend on the Fed signaling a willingness for additional tightening.
Oil prices climbed to $107 a barrel, near a four-month high, following attacks by Yemen's Iran-aligned Houthis on Saudi Arabia and a postponement of Gulf-Iran talks. This added to inflation concerns and pushed benchmark 10-year Treasury yields above 5% for the first time since October 2023. These inflationary pressures, combined with a stronger-than-expected jobs report and a pickup in consumer prices for August, have strengthened market conviction for a Fed rate hike. Economists polled by Reuters also anticipate at least one more hike by the end of March.
The euro weakened slightly to $1.1538 against the dollar, and sterling was also softer at $1.3494. The yen pulled back from a seven-month high, trading down about 0.2% at 154.72 ahead of an anticipated Bank of Japan rate hike on Friday. The New Zealand and Australian dollars were each about 0.1% lower, while the offshore yuan held steady near a three-year high.