Dollar Gains as Oil and CPI Lift Fed Hike Bets, but Risk Appetite Holds Firm

Why It Matters

Higher U.S. inflation and oil price spikes reinforce expectations of tighter monetary policy, shaping global currency dynamics and influencing investor risk positioning.

Key Takeaways

• Dollar rises as April CPI hits 3.8% YoY, above expectations
• Brent climbs above $107, WTI above $100 amid Hormuz tension
• Sterling weakens on UK leadership turmoil after minister resigns
• Yen volatility spikes, rebounds after US Treasury backs Japan's intervention
• Fed rate‑hike odds rise to 28% as core CPI climbs to 2.8%

Pulse Analysis

The U.S. dollar posted a broad‑based gain on Thursday as fresh CPI data reinforced a hawkish Fed outlook. April’s headline inflation rose to 3.8% YoY and core CPI to 2.8%, both modestly above forecasts. Fed‑fund futures responded by lifting the odds of a rate hike to about 28% and effectively ruling out cuts for the rest of 2024. Markets now see the Fed potentially tightening further to contain inflation that is beginning to spread beyond energy‑driven components. The stronger data also nudged the 10‑year Treasury yield up five basis points, adding to the dollar’s relative appeal.

Energy markets added fuel to the rally, with Brent reclaiming $107 and WTI above $100 as uncertainty over the Strait of Hormuz persisted. Stalled U.S.–Iran talks keep a geopolitical risk premium alive, and the upcoming Trump‑Xi summit is viewed as a potential catalyst that could either ease or heighten supply concerns. Traders remain attentive, knowing any escalation could push oil higher and reinforce the dollar’s strength. Even with the range‑bound pattern, market participants price a modest upside bias for oil, reflecting lingering supply‑side uncertainty.

Currency reactions were mixed. The pound fell to a multi‑day low after a senior UK minister resigned, heightening political risk around Prime Minister Keir Starmer. The yen swung sharply before recovering when Treasury Secretary Scott Bessent affirmed U.S.‑Japan coordination to curb excessive volatility, supporting recent BOJ intervention signals. Meanwhile, the euro and Swiss franc remained near the middle of the pack, while the Canadian loonie and New Zealand kiwi outperformed the greenback. Yet overall risk appetite stayed resilient, buoyed by AI‑driven equity optimism and solid semiconductor demand, indicating investors are pricing higher inflation without fully retreating into safe‑haven assets.