Dollar mostly flat amid pared Fed rate hike bets, bond sell-off, and rising oil

The U.S. dollar was flat on Tuesday, as dovish Federal Reserve rate expectations and a let up in a steep bond sell-off was countered by an ongoing impasse between Washington and Tehran in the Middle East.

At 15:10 ET (19:10 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, was just above the flatline at 99.66. The gauge slipped to an over two-month low of 99.29 in the previous session.

U.S. 30-year yield retreats after taking out fresh 19-year high

For currency market participants, interest rates remained the big story, especially amid a rout in U.S. Treasury bonds on Tuesday that bled into global fixed-income markets. The longer-end 30-year yield, in particular, hit a session high of 5.335%, its highest level since June 2007. The instrument had pared gains since and turned lower, last down 2.6 basis points to 5.284%.

The bond sell-off has come despite benign U.S. consumer and producer price reports last week. Inflationary jitters from rising oil prices due to the Middle East impasse have countered the soft data, while massive bond offerings from mega-tech firms to fund artificial intelligence infrastructure buildouts have compounded debt worries.

Longer-end Treasury yields have been under more pressure than shorter maturities, as their extended timeline makes them more susceptible to changes in interest rates.

Traders will now be looking to the minutes of the Federal Open Market Committee’s (FOMC) July meeting scheduled for Wednesday for more insight into monetary policy outlook. Three regional Fed presidents had dissented with the FOMC’s move to hold rates steady in July, and watchers of monetary policy will be keen to see if there will be any more hawkish commentary in the minutes.

"The U.S. yield curve has seen very pronounced bear-steepening since the last Fed meeting on July 29. That’s been dragging up long-term yields everywhere else. The latest spike in oil prices is also playing a role. Bonds don’t like instability and this is a reminder that the war in the Persian Gulf is completely unresolved," Robin Brooks, senior fellow in economic studies at the Brookings Institution, said.

Oil prices extend weekly gains, Brent briefly hits $92

Speaking of the Gulf, oil prices on Tuesday extended their weekly gains, with Brent crude futures, the global benchmark, last up 0.2% to $91.02 a barrel, after earlier hitting $92. 

The advance came as the U.S. and Iran remain at loggerheads over the Strait of Hormuz, with both sides continuing to independently claim control over the vital waterway. President Donald Trump on Monday told reporters that an ongoing U.S. naval blockade of Iran’s ports gave Washington control over the strait.

"There are no talks or conversations going on, or scheduled, with the Islamic Republic of Iran. The Naval Blockade remains in full force and effect. The Hormuz Strait is open and operating. All water mines have been removed or detonated," the U.S. president said on his Truth Social service on Tuesday.