Dollar Rises on Surging Crude Prices and T-Note Yields

The dollar index (DXY00) rose by +0.14% on Tuesday, just below Monday's 1.5-week high. Tuesday's +4% surge in WTI crude oil prices raised inflation expectations and could persuade the Fed to tighten monetary policy, supporting the dollar. Also, Tuesday's increase in the 10-year T-note yield to a 19-year high of 5.04% strengthens the dollar's interest rate differentials. In addition, expectations that the Fed will raise interest rates by 25 bp at the Tue/Wed FOMC meeting support the dollar. The dollar fell from its best level on Tuesday after the Sep Empire manufacturing survey came in weaker than expected.

The US Sep Empire manufacturing survey of general business conditions fell -13.0 points to 7.6, weaker than expectations of 15.0.

Markets are pricing in a 96% chance of a +25 bp Fed rate hike at the Tue/Wed FOMC meeting.

EUR/USD (^EURUSD) fell by -0.06% on Tuesday and is just above Monday's 1-month low. The dollar's strength on Tuesday weighed on the euro. Also, Tuesday's +4% surge in crude oil prices is a negative factor for the Eurozone economy, which is heavily dependent on imported oil.

The euro found some support Tuesday after the German Sep ZEW survey expectations of economic growth rose to a 7-month high. Also, Tuesday's increase in the 10-year German Bund yield to a 17-year high of 3.57% strengthens the euro's interest rate differentials.

The German Sep ZEW survey expectations of economic growth rose +0.5 to a 7-month high of 34.7, although weaker than expectations of 40.0.

The markets are discounting a 56% chance of a +25 bp ECB rate hike at the ECB's next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.48% on Tuesday. The yen slid to a 1-week low against the dollar on Tuesday. The yen came under pressure Tuesday after a report said the Japanese government is considering a new defense spending target of 3.5% of GDP, which could boost government debt issuance to fund the increase and is bearish for the yen. Also, Tuesday's +4% surge in crude oil prices is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy. In addition, higher T-note yields on Tuesday weighed on the yen.

Yen losses today are limited after the July tertiary industry index rose more than expected. Also, today's jump in the 10-year JGB bond yield to a 30-year high of 3.04% has strengthened the yen's interest rate differentials.