Dollar Holds Near Year-To-Date Highs as Hormuz Talks Stall and Oil Climbs

Higher energy prices for longer have been a key driver of the sell-off in global bond markets since the summer, with major central banks including the Fed no longer willing to look through the energy price shock. After delivering their first hike this month, the U.S. rate market now expects the Fed to deliver almost another 100 basis points of rate hikes over the year ahead.

That repricing reinforces support for the dollar from the positive terms-of-trade shock higher energy prices deliver to the U.S. economy, and stronger U.S. economic data over the past week added to the impression the economy is better able to withstand higher interest rates. The next important resistance level for the dollar index is the high from June 24 at 101.80.

Treasury Secretary Scott Bessent urged the Fed over the weekend to keep an "open mind" on the U.S. inflation outlook, saying Chair Kevin Warsh is "well aware" the economy is seeing gains similar to, if not more substantial than, those of the 1990s internet boom under Alan Greenspan, who "let things run" — a point Bessent linked to deregulation. Recent hawkish comments from Fed officials, however, indicate they are not currently attaching much weight to the potentially disinflationary impact of AI-related productivity gains when setting policy.

The transmission runs through energy: as long as oil stays near recent highs, the Fed's reluctance to look through the price shock keeps rate expectations and the dollar's terms-of-trade advantage intact. MUFG's assessment is that this backdrop supports the dollar remaining stronger for longer. That support would weaken if a deal reopens the Strait and pulls oil back down, or if policymakers begin crediting AI-driven productivity gains as disinflationary — an outcome the recent hawkish commentary does not yet endorse.