The US dollar extended its losing streak during Wednesday's Asian trading session, slipping 0.17% to approximately 98.70, hitting its lowest level since August 24 and on track for a third consecutive daily decline. This movement appears paradoxical—soaring oil prices have fueled inflation expectations, and the CME FedWatch tool now shows the probability of a September rate hike has climbed to 60%, yet the greenback has failed to gain corresponding support. The market is flashing a noteworthy signal: rising inflation concerns and heightened rate hike expectations are not translating into upward momentum for the dollar.
Oil Price Surge Lifts Inflation Expectations, Rate Hike Odds Reach 60%
Over the past several days, the escalating US-Iran conflict has become the primary driver in the crude oil market. US forces recently struck multiple Iranian tankers near Kharg Island, rapidly boosting the geopolitical risk premium and pushing Brent crude toward the $100 per barrel threshold. The sustained rise in oil prices has directly intensified concerns about the US inflation outlook—the pass-through effect of energy costs into broader price levels is increasing the inflationary pressure facing the Federal Reserve. The CME FedWatch tool indicates that traders currently price in roughly a 60% probability of a 25-basis-point rate hike at the Fed's September meeting, a notable increase from the previous week. Under traditional market logic, a higher probability of rate hikes should provide strong support for the dollar, but the current dollar trajectory is diverging from this established pattern.
Why a "60% Rate Hike Probability" Cannot Prop Up the Dollar
① Market Has Fully Priced In, Creating a "Buy the Rumor, Sell the News" Effect
The 60% probability is not new information—markets have gradually absorbed the prospect of another Fed rate hike over the past few weeks. As the probability climbs to six-in-ten, the room for further significant upside is limited, and the marginal pricing effect is diminishing. The dollar had already received some support from rate hike expectations in earlier sessions, and is now in a vacuum period following the realization of positive catalysts, lacking new drivers.
② Traders Exercise Caution Ahead of US Inflation Data
Thursday's US Producer Price Index (PPI) and Friday's Consumer Price Index (CPI) are the key variables the market is truly waiting for. Until then, investors are reluctant to aggressively build long dollar positions at current levels, as any data point that deviates from expectations could trigger a rapid pullback. Economists at the National Bank of Canada noted, "In this context, one might ask what could stop the Fed from hiking soon and providing support to the dollar in the process," while also citing Fed Chair Warsh's reminder from his Jackson Hole speech—"Yesterday's news can easily be mistaken for what is currently happening"—and that "this observation is particularly relevant in the bond market," meaning shifts in the bond market narrative could quickly blur the policy outlook.
③ The Seesaw Effect Between Stocks and Risk Sentiment
Despite rising rate hike expectations, US equities have remained steady, with factors such as AI spending momentum, economic resilience, and corporate earnings growth continuing to support risk appetite. With risk sentiment showing no significant deterioration, the dollar's safe-haven demand is being partially suppressed.
Key Variables This Week: PPI and CPI to Set the Tone
The true directional choice will come on Thursday and Friday, as the release of US PPI and CPI data will directly influence the pricing logic for the Fed's September 14-15 policy meeting. Economists at the National Bank of Canada cautioned against overinterpreting recent data and market volatility, suggesting that understanding the Fed's "hesitation" is more important than simply betting on the direction of rate moves. If inflation data comes in mild, the probability of a rate hike could quickly recede, putting further downward pressure on the dollar; if inflation exceeds expectations, the odds will break through current levels and the dollar could regain upward support. The market is currently in a "quiet period before data," with directional breakthroughs awaiting clear signals from the inflation reports.
Summary
The dollar index has weakened for three consecutive sessions, despite soaring oil prices fueling inflation concerns and the September rate hike probability reaching 60%. This divergence—where rate hike expectations rise while the dollar falls—reflects a confluence of factors, including the market having already priced in rate hike expectations, traders remaining cautious ahead of key data, and steady risk sentiment. This Thursday's PPI and Friday's CPI data will be pivotal in determining whether the dollar can regain upward momentum—if inflation proves moderate, the dollar may continue to face pressure, while stronger-than-expected readings would reinforce rate hike expectations and support the greenback. Until then, the dollar's near-term movement is likely to remain range-bound and consolidation-focused.
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