Dollar's Bullish Break: Fed Rate-Hike Bets Resurface

The dollar surged to its highest level in a month as traders repriced the odds of a Federal Reserve rate increase. A string of hawkish comments from Fed officials through the week pushed rate-hike bets back onto the table, snapping the greenback out of a three-week consolidation range.

Federal funds futures now price a roughly 40% chance of a quarter-point hike by September, up from 25% a week earlier. That shift in expectations widened yield differentials in favor of the dollar and triggered stop-losses on short-dollar positions, several traders said. Hedge funds had built up a net short position on the dollar over the previous month, a Commodity Futures Trading Commission report showed two weeks ago, and the breakout forced some of those bets to cover.

EUR/USD gave up early gains, sliding below the 1.08 handle for the first time since mid-June. The euro had been holding above that level on a mix of better eurozone growth data and expectations the ECB would hold rates steady in September. The Fed repricing flipped that narrative, one London-based dealer said. Sterling followed suit, with GBP/USD falling back toward 1.26 after failing to hold above 1.27 in early trading.

The dollar's move also weighed on commodity prices. Gold dropped 0.7% as real yields rose, while crude oil came under pressure. The dollar rally makes dollar-denominated commodities more expensive for non-U.S. buyers. Still, crude held above its 200-day moving average, a level traders said had been drawing buy orders from algorithmic funds.

Traders pointed to Friday's nonfarm payrolls report as the next catalyst. A strong print could extend the dollar's gains, they said; a miss might reverse them, leaving the breakout vulnerable to a retest of the previous range. The report is due 8:30 a.m. ET. Until then, positioning and momentum both favor the dollar side, several traders added.