Key Takeaways
- The Dollar Index advanced 0.55% to reach 99.55, approaching its highest point in two weeks on Monday
- Traders are assigning an 86% probability to a 25 basis point Fed rate increase this week
- The euro declined 0.5% to $1.1500 following the ECB’s decision to raise rates to 2.50% last week
- Brent crude surged 3% to approximately $112 per barrel after attacks on Saudi pipeline facilities
- Bank of America forecasts the dollar will remain range-bound through year-end despite rate hike speculation
The U.S. dollar strengthened on Monday as market participants positioned for an almost-certain Federal Reserve rate adjustment this week, fueled by persistent inflation readings and a renewed surge in crude oil prices.
The Dollar Index, a measure of the greenback’s performance versus six major global currencies, gained 0.55% to settle at 99.55. This advancement broke a two-week streak of minor declines.
Current market pricing indicates an 86% likelihood of a 25 basis point rate adjustment at the Federal Reserve’s September 15-16 policy meeting, based on CME FedWatch data.
Persistent Inflation Drives Policy Expectations
The consumer price index report released Friday maintained pressure on Federal Reserve policymakers. Overall inflation remained steady at 3.4%, while the core month-over-month CPI reading increased to 0.3%.
This momentum temporarily drove the 10-year Treasury yield above 5%. Swap market participants are also incorporating strong probabilities for an additional rate adjustment in December.
The euro slipped 0.5% to $1.1500, marking a near two-week trough. Market participants are evaluating euro zone stagflation concerns alongside the strengthening dollar, after the European Central Bank elevated rates to 2.50% in its previous meeting.
The Japanese yen softened slightly on Monday, with the dollar advancing 0.65% against the currency to approximately 154.55. Nevertheless, the yen maintains a 4% gain for September, hovering near seven-month peaks reached last week.
The Bank of Japan is broadly anticipated to increase its policy rate by 25 basis points on Friday, lifting it to 1.25%. Projections for accelerated policy tightening, combined with Tokyo’s unprecedented $96.4 billion currency intervention, have driven speculators to establish net long positions on the yen for the first time since February.
Energy Price Rally Intensifies Currency Volatility
Brent crude climbed approximately 3% on Monday to near $112 per barrel. Recent attacks on Saudi Arabian pipeline infrastructure and Houthi military activity in the Red Sea region constrained Persian Gulf supply flows.
This week presents an exceptionally active schedule for central bank observers. The Federal Reserve convenes Wednesday, the Bank of England meets Thursday, and the Bank of Japan gathers Friday.
Notwithstanding Monday’s dollar appreciation, Bank of America anticipates minimal further upside. The institution projects the dollar will remain range-bound through year-end, with the exception of movements versus the yen.
BofA observed that dollar sentiment has remained subdued since Fed Chair Warsh’s July press conference, during which markets identified an absence of a definitive strategy to address above-target inflation.
The dollar has additionally struggled to benefit from climbing energy prices, which historically support the currency. Conflicting signals from Fed officials, including more accommodative remarks from Williams and Waller, have contributed to market uncertainty.
With more than three rate increases now incorporated into market expectations for the Fed, Bank of America suggests the threshold for the Fed to exceed market projections is elevated.
The firm released its analysis on September 8, 2026, in a research note titled “G10 FX back-to-school: dollar unloaded.”
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