US Dollar Hits One-Month High Ahead of Federal Reserve Meeting

The U.S. dollar index climbed to a one-month high of 101.55 as markets prepare for a two-day policy meeting by the Federal Reserve System ending Wednesday. Expectations for a rate hike of at least 25 basis points have increased to 36.3%, fueled by Middle East tensions and surging oil prices, although a pause in U.S. attacks on Iran has tempered some inflation concerns.

The dollar strengthened against the euro, sterling, and the Japanese yen. Market analysts at Pepperstone noted that a lack of meaningful buying at the front end of the Treasury curve has helped support the currency. ANZ Bank suggested that a surprise hike would likely push the dollar to new highs, particularly against lower-yield currencies like the yen and Swiss franc.

While the U.S. contemplates a hike, the Bank of Japan and the Bank of England are expected to maintain current rates during their respective meetings on Thursday and Friday. Ebury indicated that the Bank of Japan will likely need to adopt a hawkish tone to maintain credibility in its inflation mandate and support the yen, which is currently trading near 40-year lows. Investors are now awaiting second-quarter U.S. GDP data and core PCE inflation figures for further direction.