United States Dollar Index holds gains near 101.50 on revival of hawkish Fed bets

The US Dollar (USD) clings to the previous day’s gains in the Asian session on Friday, as surging oil prices due to intensified Middle East energy supply risks have revived Federal Reserve (Fed) interest rate hike expectations.

At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near an over three-week high at 101.50.

In the Asian trade, the WTI Oil price trades 0.5% lower to near $90.60, but is close to its over six-week high of $92.25 posted on Thursday. Higher oil prices boost inflation expectations, a scenario that discourages Fed officials from considering loose monetary conditions.

The closure of the Bab el-Mandeb Strait, along with the Strait of Hormuz, has disrupted 27% of global energy supply.

Meanwhile, no signs of a diplomatic breakthrough between the US and Iran indicate that supply shocks could last long. On Thursday, US President Donald Trump said that Washington would hold Iran responsible for the Yemen-based Houthis’ actions and warned that Iran and its Houthi allies would both soon receive a “major military punishment”.

According to the CME FedWatch tool, the odds of the Fed delivering an interest rate hike in the policy meeting next week stand at 35.8%, significantly higher from 11.8% recorded last week. Fed’s interest rate hike prospects were similar to the current state a month ago, but they eased later after the release of the soft US Consumer Price Index (CPI) data for June.