High energy costs support the US dollar

The US dollar is holding relatively firm ahead of the late‑October Federal Reserve meeting, with the US dollar index (DXY) around 101.75 to 101.81. The currency has been supported by a renewed spike in energy prices, which has reinforced expectations that US interest rates may stay elevated and could rise again later in the year.

Brent crude (UKOIL) oil prices have climbed about 3% to near $116.7 to $116.9 per barrel, marking their highest levels since late April. The latest increase followed Houthi attacks on Saudi Arabian energy facilities and reportedly the United States may continue strikes against Iran, prompting traders to reassess geopolitical and supply risks in energy markets.

The sharp rise in oil prices has rekindled concerns about inflation, feeding through into higher US government bond yields. The 10‑year US Treasury yield has risen by roughly 4 to 5 basis points to near 4.99%, while the 2‑year yield has climbed to 4.69%.

With energy costs elevated, there is less scope for Treasury yields to decline meaningfully. This dynamic supports the dollar by maintaining an attractive yield differential, especially against currencies whose central banks are perceived as closer to the end of their tightening cycles.

Market pricing indicates that the Federal Reserve is expected to keep the federal funds rate unchanged around 4% at its October policy meeting, within a broader 3.75% to 4.00% range for the target band. Estimates of the probability of an October rate increase are relatively low, in the single‑digit to low‑double‑digit percentages.

By contrast, investors continue to assign a much higher probability to another rate hike at the December meeting. Some analysts also consider the possibility of additional tightening next year, noting that persistently high inflation data could force the central bank to act sooner and more forcefully than currently anticipated.

High energy prices are playing a key role in shaping the outlook for the euro against the dollar. Elevated oil costs limit how far US yields can fall, helping to cap the dollar’s downside, while simultaneously weighing on currencies from economies that rely heavily on energy imports, including the euro.

As traders prepare for upcoming policy decisions from both the Federal Reserve and the European Central Bank, the combination of strong US yields and sustained energy prices leaves the dollar comparatively well supported. This backdrop suggests that moves in EUR/USD (EURUSD) and other major pairs are likely to remain sensitive to both energy market developments and incoming inflation data.