A series of positive factors combined to drive the dollar higher.
2026-09-14 21:46:11
The US dollar strengthened at the start of the week, buoyed by a confluence of positive factors both domestically and internationally. Domestically, last week's higher-than-expected CPI data virtually sealed the Fed's decision to raise interest rates on Wednesday. Latest data shows that core CPI rose 0.3% month-on-month in August, higher than the market expectation of 0.2%, pushing federal funds futures' pricing of this FOMC rate hike from about 15 basis points last week to nearly 22 basis points currently, with a probability approaching 88%. 
Market consensus is almost unanimous, with a 22 basis point rate hike already priced in. This may mean limited upside for the dollar today, but it still has room to catch up with higher front-end interest rates. Meanwhile, given the bond market's demand for policy credibility and recent energy price increases, the Fed is likely to maintain a hawkish tone. The 2-year Treasury yield has risen by approximately 26 basis points last week, and the dollar index has rebounded above its 200-day moving average (around 99.15) at the beginning of this week, with spot levels around 99.5, indicating that the positive correlation between interest rates and the dollar is being re-established. Externally, following the drone strikes in Iraq, Saudi Arabia shut down the East-West oil pipeline, causing oil prices to rise again today. Brent crude briefly broke through $108 per barrel, a gain of over 3%. The pipeline has a daily capacity of approximately 5 to 7 million barrels, accounting for about 4%-5% of global supply. Its closure further exacerbates supply concerns amid the obstruction of the Strait of Hormuz. This pipeline is a crucial alternative route to the Strait of Hormuz, involving approximately 7 million barrels of exports per day. Meanwhile, negotiations led by Oman with Iran and other Gulf states regarding a temporary shipping route through the Strait of Hormuz have been postponed. The postponement is primarily due to a request from Saudi Arabia and is related to recent Houthi actions and the deteriorating situation in the Red Sea; substantial progress is unlikely in the short term. Against this backdrop, risk sentiment remains fragile, with calls from prominent tech figures to slow AI development further exacerbating already weak stock market pressures. Anthropic CEO Dario Amodei publicly called on Saturday to slow the development of cutting-edge models, echoed by OpenAI's Sam Altman and xAI's Elon Musk, leading to a sharp decline in Asian and European chip stocks (SoftBank fell over 10%, SK Hynix, Samsung, etc. suffered heavy losses), and Nasdaq futures fell nearly 2% before the market opened, further supporting the US dollar due to safe-haven demand. The US dollar is expected to strengthen moderately. The disciplined monetary policy signals conveyed by the Federal Reserve on Wednesday will help gradually rebuild the positive correlation between the US dollar and US Treasury yields, allowing the dollar to more effectively function as a safe-haven asset. A return of the US dollar index to the 99.50-100.00 range is realistic and entirely consistent with current driving factors. If an interest rate hike is implemented and accompanied by a hawkish stance, the upper limit of this range may be further consolidated in the short term. One risk to this view is that US President Trump has pledged to give every American $5,000 if the Republicans win Congress in the midterm elections. This "Trump dividend" proposal, if fully implemented, could cost between $1.2 trillion and $1.3 trillion, potentially funded by tariff revenue, but faces significant legislative and debt sustainability obstacles. The market remains skeptical of this proposal, partly due to legislative hurdles and partly because the Democrats maintain a solid lead in the House of Representatives in polls and forecasting markets. Even so, this commitment could indicate that the government is willing to use fiscal measures before the election, despite persistent concerns about debt sustainability. Any indication that such measures are being taken seriously could trigger a rise in the dollar risk premium.
Market consensus is almost unanimous, with a 22 basis point rate hike already priced in. This may mean limited upside for the dollar today, but it still has room to catch up with higher front-end interest rates. Meanwhile, given the bond market's demand for policy credibility and recent energy price increases, the Fed is likely to maintain a hawkish tone. The 2-year Treasury yield has risen by approximately 26 basis points last week, and the dollar index has rebounded above its 200-day moving average (around 99.15) at the beginning of this week, with spot levels around 99.5, indicating that the positive correlation between interest rates and the dollar is being re-established. Externally, following the drone strikes in Iraq, Saudi Arabia shut down the East-West oil pipeline, causing oil prices to rise again today. Brent crude briefly broke through $108 per barrel, a gain of over 3%. The pipeline has a daily capacity of approximately 5 to 7 million barrels, accounting for about 4%-5% of global supply. Its closure further exacerbates supply concerns amid the obstruction of the Strait of Hormuz. This pipeline is a crucial alternative route to the Strait of Hormuz, involving approximately 7 million barrels of exports per day. Meanwhile, negotiations led by Oman with Iran and other Gulf states regarding a temporary shipping route through the Strait of Hormuz have been postponed. The postponement is primarily due to a request from Saudi Arabia and is related to recent Houthi actions and the deteriorating situation in the Red Sea; substantial progress is unlikely in the short term. Against this backdrop, risk sentiment remains fragile, with calls from prominent tech figures to slow AI development further exacerbating already weak stock market pressures. Anthropic CEO Dario Amodei publicly called on Saturday to slow the development of cutting-edge models, echoed by OpenAI's Sam Altman and xAI's Elon Musk, leading to a sharp decline in Asian and European chip stocks (SoftBank fell over 10%, SK Hynix, Samsung, etc. suffered heavy losses), and Nasdaq futures fell nearly 2% before the market opened, further supporting the US dollar due to safe-haven demand. The US dollar is expected to strengthen moderately. The disciplined monetary policy signals conveyed by the Federal Reserve on Wednesday will help gradually rebuild the positive correlation between the US dollar and US Treasury yields, allowing the dollar to more effectively function as a safe-haven asset. A return of the US dollar index to the 99.50-100.00 range is realistic and entirely consistent with current driving factors. If an interest rate hike is implemented and accompanied by a hawkish stance, the upper limit of this range may be further consolidated in the short term. One risk to this view is that US President Trump has pledged to give every American $5,000 if the Republicans win Congress in the midterm elections. This "Trump dividend" proposal, if fully implemented, could cost between $1.2 trillion and $1.3 trillion, potentially funded by tariff revenue, but faces significant legislative and debt sustainability obstacles. The market remains skeptical of this proposal, partly due to legislative hurdles and partly because the Democrats maintain a solid lead in the House of Representatives in polls and forecasting markets. Even so, this commitment could indicate that the government is willing to use fiscal measures before the election, despite persistent concerns about debt sustainability. Any indication that such measures are being taken seriously could trigger a rise in the dollar risk premium.
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