Dollar Rises as Stocks Fall Amid Inflation and Rate Hike Expectations
The U.S. dollar index rose by +0.10% on Tuesday amid weakness in global stock markets, which increased demand for dollar liquidity. A rally in WTI crude oil to a three-week high raised inflation expectations, potentially prompting the Federal Reserve (Fed) to tighten monetary policy—a positive factor for the dollar. Additionally, rising U.S. Treasury note yields strengthened interest rate differentials as 10-year T-note yields hit a 1.5-year high of 4.75%. U.S. economic data was mixed: July import prices excluding petroleum rose more than expected (+0.3%), while housing starts fell sharply (-12.4%). However, building permits and manufacturing production met or exceeded expectations. The market is currently pricing in a 35% chance of a +25 basis point rate hike at the Fed’s next meeting on September 15-16. The euro weakened against the dollar due to higher crude oil prices, which are bearish for Europe's energy-dependent economy. However, German economic sentiment improved as the ZEW survey hit a six-month high and European bond yields rose. The yen also fell but found some support from rising Japanese government bond yields and expectations of a Bank of Japan (BOJ) rate hike.
Topics: dollar fed policy inflation expectations stocks