The U.S. dollar strengthened for a fourth consecutive session on Monday as investors positioned for a potential Federal Reserve interest-rate increase this week, while another surge in oil prices reinforced concerns about inflation.
The dollar index moved back above its 200-day moving average near 99.15, supported by a sharp repricing of U.S. interest-rate expectations following stronger inflation data. The two-year Treasury yield rose about 26 basis points last week as traders increased bets on further monetary tightening.
Markets were pricing an 86% chance that the Fed will raise its benchmark rate by 25 basis points on Wednesday, according to CME FedWatch data cited by Reuters, with another increase expected later this year.
A Reuters poll published Monday showed an even stronger consensus among economists: 86 of 101 economists, or 85%, expect a quarter-point increase, which would lift the federal funds target range to 3.75%-4.00% and mark the Fed’s first rate increase since July 2023.
Inflation Data Strengthen Rate-Hike Expectations
Expectations for tighter monetary policy increased after Friday’s U.S. inflation report.
Consumer prices rose 0.4% in August, while core CPI, which excludes food and energy, increased 0.3% from July. The monthly core reading reinforced concerns that underlying inflation is not cooling quickly enough toward the Fed’s 2% objective.
Annual headline inflation remained at 3.4%, while separate producer-price data showed additional price pressures in components that feed into the Personal Consumption Expenditures index, the Fed’s preferred inflation measure.
The combination of persistent inflation and resilient economic activity has prompted several major financial institutions to change their expectations for this week’s meeting. Reuters reported that Goldman Sachs and JPMorgan are now among institutions expecting a quarter-point increase.
Oil Above $107 Adds to Inflation Concerns
Energy prices are adding another complication for the Fed.
Brent crude climbed about 3% to $107.81 a barrel on Monday, while U.S. crude advanced to around $102.94, after Saudi Arabia’s East-West pipeline was hit by drone attacks and shut down.
The pipeline has become particularly important because it provides Saudi Arabia with an alternative export route while shipping through the Strait of Hormuz remains constrained. Before the shutdown, it had been carrying roughly 4 million to 5 million barrels per day, according to Reuters.
The prospect of oil remaining above $100 could prolong energy-driven inflation and complicate the Fed’s efforts to bring overall price growth back toward target.
Dollar Gains Remain Relatively Modest
Despite the sharp shift in rate expectations, the dollar’s advance has been comparatively limited. MUFG noted that the dollar index has gained only about 0.3% over the past week, even as markets substantially increased expectations for monetary tightening.
The Fed begins its two-day policy meeting on Tuesday, with its interest-rate decision due Wednesday. Beyond the immediate decision, attention will focus on policymakers’ updated rate projections and Chair Kevin Warsh’s press conference for indications about the potential pace of further tightening. Reuters’ latest poll found that a narrow majority of forecasters expect at least one additional increase by the end of March 2027.
