Oil prices and US Treasury yields both rise, while the strengthening US dollar puts pressure on non-US currencies

1. On Tuesday, the US Dollar Index rose to near a two-week high, currently trading around 99.65, up about 0.18%. The surge in oil prices drove US Treasury yields to their highest levels since 2007, further reinforcing market expectations for a Federal Reserve rate hike this week. The yield on the 10-year US Treasury reversed early session losses during Asian trading, reaching as high as 5.0266%, the highest level since 2007.2. The Yemeni Houthi forces attacked Saudi Arabia, negotiations between Gulf countries and Iran were postponed, pushing Brent crude oil up to around $107.5 per barrel, near a four-month high. According to the CME FedWatch Tool, the market places about a 93% probability on a Federal Reserve rate hike on Wednesday. OCBC analysts highlighted that rising oil prices, higher US Treasury yields, and weakening risk appetite have collectively strengthened the dollar across the board. However, as rate hike expectations have been fully priced in, further dollar gains may require the Federal Reserve to send more tightening signals.3. In major currencies, the euro fell against the dollar to around 1.1532, near a one-month low; the pound declined 0.25% to 1.3463, hitting its lowest level in over a month, with weak UK employment data also dragging on the pound's performance; the yen retreated from a seven-month high, with USD/JPY rising as much as 0.4% to 154.95, a one-week high, though the market expects the Bank of Japan to raise rates on Friday. The New Zealand dollar fell 0.35% against the US dollar, while the Australian dollar dropped 0.3%.4. The US August employment report far exceeded expectations, and the rise in the consumer price index further strengthened expectations for a Federal Reserve rate hike on Wednesday. Economists expect at least one more rate hike before the end of March. BCA analysts believe that the inflation outlook depends on oil prices, but the overall macro environment does not support a rate hike larger than what is currently priced into the yield curve, so further hawkish room is limited. This supports a steeper yield curve and also limits the upside for the US dollar.