Brown Brothers Harriman (BBH) strategist Elias Haddad said Wednesday that Brent crude’s rally toward $100 a barrel is giving the US dollar a modest lift, but the currency’s next major move hinges on Friday’s August Consumer Price Index (CPI) report and its implications for the Federal Reserve’s September 16 policy meeting.
Haddad noted that the surge in oil prices — driven by supply disruptions and geopolitical tensions — has simultaneously pressured global equities and pushed bond yields higher, as investors recalibrate their expectations for inflation and central bank action. “The oil shock is feeding through to risk sentiment, and the dollar is benefiting from its safe-haven appeal,” he wrote in a note to clients.
Also read: AUD/USD Steadies Near 0.7220 After Hitting Four-Month High, as US Yields Rebound
Oil’s Cross-Market Ripple Effect
Brent crude has climbed roughly 15% over the past month, touching levels not seen since late 2023. The rally has been fueled by extended production cuts from major exporters and renewed supply concerns in the Middle East. For markets, the implications are twofold: higher energy costs threaten corporate margins and consumer spending, while also complicating the inflation outlook that central banks are trying to tame.
The dollar index, which measures the greenback against a basket of six major currencies, has firmed slightly this week, buoyed by haven flows. However, Haddad emphasized that the currency’s trajectory remains tightly tied to the Fed’s policy path rather than oil alone.
Also read: Yen firms toward 153 as US Treasury comments fuel BOJ policy shift bets – MUFG
CPI Report: The Fed’s Tipping Point
Friday’s CPI data will be the last major inflation reading before the Fed’s September 16 decision. Economists expect headline CPI to show a modest year-over-year increase of around 2.6%, with core inflation — which excludes food and energy — running slightly hotter at 3.0%. A downside surprise could cement expectations for a 25-basis-point rate cut, while an upside shock would likely force the Fed to hold rates steady and adopt a more hawkish tone.
Haddad stressed that the Fed’s reaction function is now heavily data-dependent. “The committee has made clear that it needs sustained evidence that inflation is moving sustainably toward its 2% target,” he said. “Friday’s report will be decisive.”
Market pricing currently implies roughly a 70% probability of a quarter-point cut in September, according to CME Group’s FedWatch tool. A hot CPI reading could slash those odds and trigger a sharp repricing across Treasuries, equities, and the dollar.
What a Rate Cut Would Mean for the Dollar
If the Fed does cut rates, the dollar would likely come under renewed pressure, as lower yields reduce the appeal of US assets. That scenario would be a tailwind for emerging-market currencies and gold, which has already benefited from haven demand and rate-cut expectations.
Conversely, a decision to hold rates steady — or a hawkish cut accompanied by signals of a pause — could extend the dollar’s recent resilience. Haddad noted that the dollar’s safe-haven status is also being reinforced by the oil-driven risk-off tone, creating a complex dynamic where the currency could rally even if the Fed eases.
Beyond the Fed: Global Ripple Effects
The interplay between oil and the dollar has broader implications for global markets. A stronger dollar typically tightens financial conditions in emerging economies, making dollar-denominated debt more expensive to service. At the same time, higher oil prices disproportionately hurt energy-importing nations, widening trade deficits and pressuring their currencies.
For now, traders are bracing for volatility. The options market shows elevated implied volatility around Friday’s CPI release, suggesting that investors expect a significant move in the dollar and Treasuries regardless of the outcome.
As Haddad put it, “The path of least resistance for the dollar will be dictated by inflation data, not oil. But the two are increasingly intertwined, and that makes the next few sessions particularly tricky for forecasters.”
All eyes now turn to the Labor Department’s release at 8:30 a.m. ET Friday. A clear outcome could set the tone for markets well beyond the Fed’s September meeting.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Currency and commodity markets are highly volatile, and any investment decisions should be made based on your own research and consultation with a qualified financial advisor.
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