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Brent above $100 props up the dollar ahead of the Fed's September minutes
Brent's return above $100 lifted the dollar index 0.3% to 102.13 on Wednesday, even as traders cut October Fed hike odds to 21.6% from about 51%. That leaves the dollar leaning on oil prices while the September minutes test how much appetite the Fed still has for hikes.
The Investor · Invest desk
What happened
- The Fed releases minutes on Wednesday from its September meeting, where it raised interest rates for the first time since 2023.
- Fed officials have sounded less hawkish since lower-than-expected PCE inflation and jobs figures came out last week.
- Brent climbed on fears a storm would disrupt US oil-producing regions and after Houthi attacks on Aden International Airport.
- Kansas City Fed President Jeff Schmid said on Tuesday the Fed must raise rates further, against calls for patience from other officials.
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Why it matters
- exposure Long-dollar holders now carry oil risk on a Fed timetable that has slipped, so a fall in Brent can cost them before the December meeting arrives.
- decision Anyone timing dollar hedges around an October hike, now rated at about one in five, has to plan around the December meeting instead.
- contradiction Schmid wants more hikes while colleagues urge patience, so the minutes can show whether September's hike had committee support for a second.
Over two sessions the dollar index has barely moved. A 0.27% slide on Tuesday and a 0.3% gain on Wednesday [1] multiply out to 0.9973 times 1.003, which leaves the index about 0.03% above Monday's close [22]. Part of Wednesday's recovery came from the euro, which fell 0.4% to $1.1216 [15] as it gave back a Tuesday rally. That rally followed Marine Le Pen raising her target for spending cuts to 140 billion euros from 125 billion if she wins power in 2027 [16]. The rest of the gain came with oil, according to the report on the day's trading [2].
Rate pricing moved much further over the week than the currency did. The chance of an October hike of at least 25 basis points fell to 21.6% from about 51% a week earlier, according to CME FedWatch [6]. The odds lost about 29 points and now sit at roughly two-fifths of where they started [23]. Markets still expect more increases later this year and next [7].
Dominic Bunning, head of G10 FX strategy at Nomura, said his team has held a long-dollar view for weeks. "We've been able to have that long-dollar view on for a few weeks now. It's worked quite nicely. But I think there's an element of momentum starting to slow here," he said [8]. He added that higher oil prices were lending the dollar short-term support [9]. In my view, that trade is now more likely to be closed than added to.
The minutes may matter less than the calendar around them. Christopher Waller, Neel Kashkari and Alberto Musalem are all due to speak later on Wednesday [14], so the minutes are one of four Fed inputs in a single day [24]. Samara Hammoud, a currency strategist at Commonwealth Bank of Australia, said in a report: "With little forward guidance from Chair (Kevin) Warsh, markets have reacted sharply to each US data release and policymaker speech." [11] Her forecast is short: "We expect the Fed to wait until December before hiking again." [12]
I think the dollar at 102.13 is trading mainly on oil and French politics, with a December hike already largely in the price [1][7]. Minutes that show wide support for further hikes, followed by a dollar that rises while Brent falls, would change that. That result would mean the Fed was carrying the currency all along, and it would prove the oil view wrong. A calmer Middle East would test the view from the other side. JD Vance told Reuters that ending the eight-month war requires Iran to make a meaningful reduction in its nuclear enrichment capacity [17]. Bunning named that risk and another in one sentence: "If we get any sign of improvement in the Middle East (situation) going into the midterms, or further signs that US data is softening ... that could also be something that weighs on quite elevated rate expectations in the year ahead." [10] The other risk is softer US data. More of it could pull December's odds down the way October's fell.
What to watch
- Whether the Bank of Japan signals this month that underlying inflation has roughly hit 2%, with the yen at 158.31 per dollar despite board member Ayano Sato backing staged hikes.
- French deficit politics ahead of the 2027 election and Spain's snap election, both cited as pressure on the euro and so on the dollar index.
- August consumer credit, expected to fall to $15 billion from $18.06 billion in July, as one more release for a market that reacts to each one.