Investors Flock To US Dollar Amid Rising Energy Prices

As investors’ concern about rising energy prices gain momentum, the dollar held steady against the yen, with the greenback hitting a nearly three-year high ahead of expectations that the Federal Reserve will taper its bond purchases next month.

The strength of energy markets is also a positive for the dollar. Yesterday’s seven-year highs in crude oil prices haven’t budged overnight.

A lot of strength was also seen in base metals and agricultural commodities last month. Considering oil and other commodities are traded largely in dollars, there will be a need to buy a lot of dollars to keep up with demand – at least until high prices cause the demand to decline.

A quick glance at the Dollar Index shows it was trading at around 94.3, having touched a high of 94.442 index points overnight.

Monday was a holiday in the world’s largest economy, but the yield on benchmark 10-year Treasuries hit a four-month high of 1.617 on Friday after the U.S. economy created fewer jobs in September than expected, shattering forecasts.

However, the data for August were revised sharply upward and the unemployment rate declined to an 18-month low, indicating the labor shortage concerns remain valid, providing the Fed with grounds to cut its emergency stimulus program.

While the economy is recovering from the global pandemic, the Fed intends to reduce the emergency measures. In fact, markets have already priced in this tapering. Chairman Powell stated that a taper ending mid-2022 may be appropriate at the last Fed meeting.

The Fed’s target for inflation is 2%. Price increases were 3.6% in July, even using the Fed’s preferred inflation