USD strengthens as Fed rate hike bets and plunging Brent crude widen transatlantic yield spreads, though MUFG forecasts a year-end pullback.
The dollar index broke above its year-long trading range, driven by Federal Reserve hawkishness and a sharp reversal in Brent crude prices. US yields rose as Fed Chair Kevin Warsh’s inflation rhetoric fueled expectations for multiple rate hikes, while Brent fully unwound its conflict-driven rally, compressing European rate expectations.
EUR/USD slipped below 1.1000, with options markets signaling stronger conviction for USD gains against the euro than the yen. The transatlantic yield spread widened, acting as the primary driver of the dollar’s move. MUFG noted the dollar’s second straight weekly gain but expects strength to fade by year-end.
The dollar index approached levels last seen before the April 2025 tariff announcement, as collapsing energy prices and Fed policy divergence with Europe bolstered USD momentum. However, MUFG’s base case remains a recovery in EUR/USD to 1.1400-1.1800.