The US dollar climbed to its highest level in more than a week on Tuesday as traders increased bets on a Federal Reserve interest rate hike.
Higher US Treasury yields and another rise in crude oil prices also supported the greenback.
Dollar Index Climbs Above 99.60
The US Dollar Index, which measures the dollar against six major currencies, gained around 0.24% to trade near 99.60.
The move reflected growing expectations that the Federal Reserve will raise borrowing costs at its upcoming policy meeting.
Euro Falls to One-Month Low
The euro remained under pressure and traded near its lowest level in a month.
EUR/USD slipped about 0.1% to around $1.1539 as investors weighed concerns over weak eurozone growth and persistent inflation.
The decline came despite the European Central Bank raising interest rates by 25 basis points to 2.50% last week.
Market sentiment continued to favor the dollar as traders focused on the prospect of tighter US monetary policy.
Japanese Yen Weakens Ahead of BOJ Decision
The Japanese yen also moved lower against the dollar.
USD/JPY climbed to around 154.82, pushing the yen to its weakest level in more than a week.
The move extended the currency’s retreat from a seven-month high of 152.89 per dollar reached last week.
Traders are now waiting for the Bank of Japan’s policy decision on Friday.
Fed Rate Hike Odds Rise Above 92%
The Federal Reserve begins its two-day policy meeting on Tuesday, with markets increasingly confident that another rate hike is coming.
According to CME FedWatch pricing, traders see a 92.1% probability of a 25-basis-point increase.
Such a move would lift the federal funds target range to 3.75%-4.00%.
That probability has risen sharply from roughly 60% a week earlier.
Markets are also pricing in a 53.4% chance of another rate hike in October, suggesting investors believe the Federal Reserve may continue tightening monetary policy.
Treasury Yields and Oil Prices Support the Dollar
Rising bond yields have provided additional support for the US dollar.
The benchmark 10-year US Treasury yield climbed above 5%, reaching its highest level since 2007.
At the same time, Brent crude moved above $113 per barrel as geopolitical tensions increased concerns about global energy supplies.
Fresh attacks on Saudi Arabian pipeline infrastructure and Houthi activity in the Red Sea have added to fears of prolonged supply disruptions.
Higher energy prices could keep inflation elevated, increasing pressure on central banks to maintain tighter monetary policy.
Markets Focus on Fed Inflation Risks
Investors are increasingly pricing in the possibility of a new Federal Reserve tightening cycle as energy costs threaten to keep inflation elevated.
However, some analysts remain cautious about extending bullish dollar positions before the Fed meeting.
Two senior Federal Reserve officials had previously signaled that keeping rates unchanged remained an option before the central bank entered its pre-meeting blackout period.
As a result, traders will closely watch the Fed’s policy statement and guidance for clues about the future path of interest rates.
BOJ Rate Hike Could Shape Yen Outlook
Attention will also shift to Japan later in the week.
Markets broadly expect the Bank of Japan to raise interest rates by 25 basis points to 1.25%.
The key question is whether policymakers will signal that additional tightening could follow at a faster pace.
Despite its recent pullback, the yen has gained roughly 4% this month.
The currency has been supported by capital returning to Japan and a sharp rise in Japanese government bond yields.
Japan’s benchmark 10-year government bond yield recently reached 3.025%, its highest level in around 30 years.
With major central bank meetings approaching, volatility across the US dollar, euro and Japanese yen could remain elevated throughout the week.
