By: Fiona Cincotta, Senior Market Analyst
Currency markets tend to be framed as a contest between central banks, but oil has a way of writing itself into the story. Oil prices and the dollar are moving in the same direction, as a rebound in West Texas Intermediate crude feeds U.S. inflation concerns, lifts Treasury yields and helps keep the U.S. dollar at a two-month high. That matters well beyond the energy market, because it lands on top of hawkish Federal Reserve signals and a Bank of Japan that has struggled to support the yen. The result is a dollar with more than one engine behind it, and a yen that has weakened more than 3% in just two weeks.
Fiona Cincotta, StoneX Senior Market Analyst, has more than 15 years of experience trading and analyzing U.K., European and U.S. markets, combining fundamental and technical analysis. Her coverage spans forex, commodities and equities, tracking how macroeconomic data, energy prices and central bank policy feed through to currencies such as the U.S. dollar and the Japanese yen.
"That's also supporting these inflationary concerns, lifting yields and keeping the dollar at a two-month high," Cincotta says of the recovery in West Texas Intermediate crude. A rebound in oil prices is reinforcing U.S. inflation concerns at a moment when Federal Reserve speakers have backed the view that the Federal Reserve may need to hike interest rates several more times to bring inflation back to its 2% target. The energy signal arrives alongside a U.S. composite PMI at its strongest level in over five years, a reading that lifted market-implied odds of an October Federal Reserve hike to 75% from 50%. Meanwhile, the 10-year Treasury yield has pushed to fresh 19-year highs. For currency traders, the upshot is a U.S. dollar supported from several directions at once, with oil now part of the same inflation story as the Federal Reserve's own signals.
The Japanese yen has weakened more than 3% in two weeks even though the Bank of Japan raised rates by 25 basis points to a 31-year high, because markets are not convinced further tightening is coming. Governor Kazuo Ueda, Cincotta explains, "failed to really convince the market that the Bank of Japan is aggressively looking to hike rates further", and the yen has slid as a result. Conversely, the Federal Reserve raised rates by 25 basis points and signaled two more hikes, a path that oil-driven inflation concerns only reinforce. That policy divergence is what is lifting USD/JPY, sending the pair back toward the zone traders associate with Japanese intervention. For anyone following the yen, oil has become an indirect but meaningful input, feeding U.S. inflation concerns and yields on one side of a policy gap the Bank of Japan has not convinced markets it will close.
--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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A rebound in oil is adding to U.S. inflation concerns, pushing Treasury yields higher and keeping the dollar at a two-month high. Together with a Bank of Japan that has not convinced markets it will keep hiking, that pressure is driving the yen lower.
September 24 – Angst in the bond market and increasing expectations of higher for longer interest rates has stock futures pointing to a lower open today, with trade likely to be volatile around headlines from today’s Trump/Xi meeting. Treasury yields yesterday rose to fresh multi-year highs across the curve, with the biggest moves seen in the long end. Most notably, 30-year yields made a new high not seen since 2004, 10-year yields made highs not seen since 2007, and 2-year yields made new highs not seen since early 2024. They do look to be coming off of these highs to start the day, with 2-year yields back down to 4.85%, 10-year yields at 5.10%, and 30-year yields at 5.40% at the time of writing. The VIX is pushing to its highest level of the week back above 16, but it’s worth noting this remains on the low-end of 2026’s trade. The dollar is continuing its surge higher as well amid the aforementioned rising rate expectations, posting another near two-month high above the 101.3 mark. Crude oil is bouncing from its recent bottom but remains notably lower than trade over the last two weeks, with nearby WTI trading at $93.70 and nearby Brent trading at $99.80 at the time of writing. The ags are largely mixed, with soybeans showing the most strength at the break with all eyes on today’s Trump/Xi meeting, with major implications for the sector.
A renewed rebound in oil prices is squeezing the currencies of major energy importers, from the euro and the pound to the Swiss franc and the yen. Fading Iran deal hopes and a Strait of Hormuz incident keep crude supply risk in focus while a hawkish Federal Reserve keeps the U.S. dollar supported.
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