The U.S. dollar rose to its highest level since September 2, with the dollar index climbing 0.3% to 99.39 in late Monday trading, as strengthening economic data and escalating expectations for a Federal Reserve interest-rate increase bolstered the greenback across global currency markets.
The benchmark U.S. 10-year Treasury yield briefly touched 5% on Monday — a level not seen since October 2023 — adding further upward pressure to the dollar and reinforcing market pricing for tighter monetary policy ahead. According to the CME FedWatch tool, the probability of a rate hike stood at 92.5%, up sharply from 87.3% the prior day and 59.4% a week earlier, as traders rapidly repriced the likelihood of additional Fed tightening.
Deutsche Bank analysts, led by Matthew Luzzetti, updated their outlook to expect three consecutive 25-basis-point rate increases in September, December, and March, amounting to 75 basis points of total tightening. "In our view, the case for a rate hike is strong," the bank said in a research note. "Growth remains solid, the labor market has rebounded and is showing some signs of tightening, and PCE inflation has demonstrated limited evidence of falling back towards target. Forward-looking indicators, including from energy prices, suggest the inflation overshoot is likely to persist for some time."
The bank added that the anticipated action would effectively unwind the risk-management rate cuts the Fed delivered the prior year, reflecting a markedly hawkish pivot. Meanwhile, crude oil prices have surged nearly 20% over the preceding two weeks, driven by supply concerns tied to tensions involving Iran, Saudi Arabia, and Houthi forces in Yemen — another factor weighing on commodity-linked and Asian currencies.
Asian currencies bore the brunt of the dollar's advance. The Japanese yen, despite recent strength, saw the USD/JPY pair rise 0.5% to 154.29, though the yen remained broadly near its seven-month high against the dollar as the Bank of Japan continued its cautious policy stance. The British pound slipped 0.2% to $1.3494, while the Canadian dollar weakened slightly, with USD/CAD climbing 0.2% to 1.3899.
Canada's consumer price index rose 3.0% year-over-year in August, unchanged from July, according to data analyzed by JPMorgan analysts Bennett Parrish and Michael Hanson. "While today's report hinted at some modest firming beneath the headline reading, it still showed little evidence of the broad-based acceleration in underlying inflation that the Bank of Canada has flagged as a risk from a prolonged energy shock," they noted. The Bank of Canada held rates steady for a seventh consecutive meeting earlier in September, maintaining its pause amid mixed signals from the inflation data.
