Dollar gains as oil, yield increases revive inflation fears
Oil pump jack is seen in front of displayed U.S. dollar banknote and rising stock graph in this illustration taken, October 8, 2023. REUTERS/Dado Ruvic/Illustration
Sept 1 : The dollar strengthened on Tuesday as renewed U.S.-Iran hostilities sent oil prices higher, fuelling inflation worries and sparking a global bond selloff.
U.S. President Donald Trump threatened further strikes against Iran after the first exchange of direct attacks in a month, pushing oil prices up over 2 per cent.
The 10-year Japanese government bond yield touched 3 per cent for the first time in 30 years, while the yield on 10-year Treasury notes hit its highest since January 2025. [US/]
"A rout in global bond markets is intensifying and the dollar is climbing as an outbreak in hostilities between the U.S. and Iran revives inflation risks, raises the likelihood of interest rate hikes in the months ahead, and makes safe havens more appealing," said Karl Schamotta, chief market strategist at Corpay.
The move comes after Federal Reserve Chairman Kevin Warsh was seen as adopting a more hawkish tone on monetary policy. In his debut speech at the Jackson Hole symposium, Warsh said the Fed would "have work to do" if inflation failed to cool, his strongest hint yet that further rate hikes could be needed to contain price pressures.
Fed funds futures traders are now pricing in 68 per cent odds of a September rate hike, up from 35 per cent before Warsh's comments on Friday.
August's jobs and consumer price inflation data, which are both due before the Fed's September 15-16 meeting, may now be key to whether the U.S. central bank hikes next month.
This Friday's jobs report is expected to show that employers added 56,000 jobs last month, according to the median estimate of economists polled by Reuters.
Fed Governor Michael Barr said on Tuesday that if inflation does not cool quickly, it will be time for the U.S. central bank to increase interest rates.
U.S. Treasury Secretary Scott Bessent, meanwhile, said on Tuesday that U.S. bond yields are showing that inflation expectations are "flat to down" and reflect accelerating U.S. growth.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.16 per cent to 99.57, with the euro down 0.15 per cent at $1.1599.
Sterling weakened 0.07 per cent to $1.3538.
YEN WEAKENS
The Japanese yen fell 0.22 per cent to 160.08 per dollar.
The Japanese currency was supported on Monday after Bessent said he believed Japan's government and central bank would take action that leads to a stronger yen. While the BOJ was already widely expected to lift rates in September, Bessent's comments could effectively lock the bank into doing so and put pressure on it to step up hikes.
For now, however, the wide interest rate differential between the U.S. and Japan remains in favor of the dollar.
"Investors remain focused on Japan's still-unfavorable rate differential with the United States and doubts over how aggressively the Bank of Japan will tighten policy," said Joel Kruger, market strategist at LMAX Group in London.
A rare joint intervention from the U.S. and Japan at the end of July provided short-lived relief for the fragile yen, yanking it away from the 40-year lows of 163.99, but the currency has since surrendered around half of the gains from the joint action.
Japanese Finance Minister Satsuki Katayama said the government will continue close dialogue with markets when asked by reporters about the rise in bond yields.
