Dollar Near Two-Month High as Oil Rises and U.S. Bond Sell-Off Continues

# What happened The U.S. dollar strengthened for a fourth straight session and was trading near a nearly two-month high. At 16:57 ET the dollar index was 101.26, its strongest level since July 28. Two market developments explain most of the move: a renewed rise in oil prices tied to geopolitical friction and an ongoing sell-off in the U.S. Treasury market.

# Why oil matters here

# The bond rout and its link to the dollar The sell-off in U.S. Treasuries continued. The 10-year Treasury yield rose 8.9 basis points to 5.205% — a level last seen in July 2007. Higher yields generally attract foreign capital and raise returns on dollar-denominated assets, which tends to support the dollar.

A recent S&P Global report showed U.S. business activity accelerating for a fourth consecutive month in September, with services and manufacturing output rising. The report also recorded an increase in input costs and an overall inflation rate at its highest since October 2022, with rising fuel and transport costs the primary drivers.

# How the Fed outlook shifted

José Torres, senior economist at Interactive Brokers, described market expectations that Fed Chair Kevin Warsh could hike rates multiple times to fight inflation driven largely by energy costs. Torres argued, however, that if inflation is driven primarily by a supply shock in energy, rapid additional tightening may be inappropriate because falling fuel prices would ease inflation back toward the Fed's 2% target.

# Market implications

• Investors facing higher yields may rotate into dollar assets for yield and perceived safety, keeping the currency supported.
• Rising oil and transport costs can translate into higher consumer prices, which may prolong elevated inflation readings and keep rate-hike risk priced into markets.
• If oil eases or a diplomatic breakthrough reduces Iran-related supply fears, some of the pressure on yields and the dollar could reverse.

# What to watch next

• U.S. Treasury yields: further rises would likely keep the dollar elevated. Significant falls could reverse the recent dollar strength.
• Oil market developments and any concrete progress in U.S.-Iran talks that affects shipping through the Strait of Hormuz.
• Upcoming U.S. economic data that could confirm or weaken expectations for an October Fed rate move.

# Bottom line The dollar's recent run reflects a convergence of higher oil prices tied to geopolitical risk, a sharp rise in Treasury yields, and stronger-than-expected business activity that pushed inflation readings higher. Those forces raised the probability of another Fed rate increase, which in turn supported the dollar near a two-month peak.