The US Dollar strengthened broadly on Monday, with the Dollar Index (DXY) trading near 99.50–99.53, up around 0.4%–0.45% on the day, as markets priced in a high probability of a Federal Reserve rate hike at the upcoming September 15–16 meeting [4][5]. The DXY's gains were driven by rising US Treasury yields, with the 10-year yield briefly touching 5.00%, its highest since October 2023 [4][5]. The CME FedWatch Tool showed a 90% probability of a 25 basis point Fed hike, and a Reuters poll indicated 86 of 101 economists expect the Fed to raise its policy rate to 3.75%–4.00% [5].
The Euro and British Pound both weakened against the US Dollar. EUR/USD traded near 1.1500, its lowest since mid-August, while GBP/USD tested two-month lows at 1.3464 before recovering slightly to 1.3492, down over 0.56% from last week's peak [2][4]. The Euro also slid against the Pound, with EUR/GBP hitting a two-week low of 0.8554 and trading around 0.8560, as the European Central Bank (ECB) maintained a hawkish stance but offered no new monetary policy signals in President Christine Lagarde's latest remarks [1]. Euro area inflation stood at 3.3%, above the ECB's 2% target [1]. The Bank of England is expected to keep its rate at 3.75%, with a 30% chance of a hike this week and a November move almost fully priced in [2][4].
The Japanese Yen weakened against the US Dollar, with USD/JPY climbing to around 156.40, up roughly 0.50% on the day, as markets fully priced in a 25 basis point rate hike by the Bank of Japan (BoJ) on Friday [5]. Despite the anticipated tightening, analysts at ING warned of downside risks for the Yen, especially if the Fed delivers a hawkish hike, which could prompt renewed USD/JPY long positions [5]. The Yen has strengthened sharply since the start of the month on BoJ tightening expectations, but with a December hike already priced in, the focus shifts to BoJ's forward guidance [5].
Elsewhere, the Euro fell against the Canadian Dollar, with EUR/CAD declining to around 1.6060, down 0.17% on the day, as the Canadian Dollar benefited from a sharp rise in Oil prices. West Texas Intermediate (WTI) traded near $100, up more than 15% this month, supported by supply concerns after Saudi Arabia shut its East-West pipeline following a drone attack [3]. Canada’s August CPI rose 3% year-over-year, unchanged from July, while core inflation measures remained contained, leading economists at RBC to expect the Bank of Canada to hold rates through 2026 [3].
Market sentiment was cautious, with investors watching upcoming central bank decisions and key economic data, including UK labor market figures and the German ZEW survey [1][2]. Rising Oil prices, driven by Middle East tensions and supply disruptions, added to inflation concerns and supported the US Dollar, as higher energy costs are seen as a headwind for energy-importing economies like Europe and Japan [2][3][4].
CONCLUSION
The US Dollar's broad strength reflects heightened expectations for a Fed rate hike and persistent inflation concerns fueled by surging Oil prices. Major currencies including the Euro, Pound, and Yen weakened as markets await central bank decisions and key economic data. The market impact is high, with further volatility likely as policy signals and inflation trends unfold.