Expectations of Federal Reserve rate hikes continue to heat up, and the dollar rises to a near two-month high.

The dollar rose to its highest level in nearly two months on Wednesday. With U.S. inflationary pressures persisting and Federal Reserve officials successively signaling a hawkish stance, the market is betting that further rate hikes remain possible in the near term, driving continued capital flows into the dollar. However, international oil prices have recently retreated from their highs, and their subsequent trajectory could affect the global inflation outlook and become an important variable for central bank monetary policy. On Wednesday, the dollar index, which measures the greenback against six major currencies, rose 0.36% to 100.92. Major non-dollar currencies came under broad pressure. The euro fell to its lowest level since late July against the dollar, last down 0.37% at $1.1405; sterling briefly dropped 0.5% to $1.3273, its lowest since early July. Recently, major central banks raising rates in quick succession and issuing hawkish remarks have become the core trading logic in the foreign exchange market. The seven-month-old U.S.-Israel and Iran conflict has pushed up energy prices and intensified inflation concerns, prompting investors to reassess the global interest rate path. The Fed last week raised its benchmark rate by 25 basis points to 3.75%-4.00%, its first hike in more than three years. Several Fed officials said this week that if inflation does not cool quickly enough, further monetary tightening may be needed in the future. "This is another indication that the Fed remains the dominant market logic, and hawkish comments from Fed officials are enough to sustain dollar demand," said ING strategist Francesco Pesole. Energy markets remain an important factor influencing the dollar and the global monetary policy outlook. Brent crude futures rose about 1% on Wednesday, reclaiming $100 per barrel and ending a five-session losing streak. Previously, the market had hoped that diplomatic activity during the United Nations General Assembly might push the seven-month Middle East war toward resolution, thereby pulling oil prices back from their highs. Since the conflict broke out in late February, Brent crude futures have gained about 37% cumulatively. At the same time, pressures on physical energy prices have been even more pronounced, with related prices in Europe rising at least 75% and in the U.S. at least 40%. Pesole said it remains uncertain whether the earlier oil price pullback can develop into a sustained decline. From a rates perspective, if crude continues to hold in the $90 to $100 per barrel range, it may still not be enough to prompt a clear shift in the market toward more dovish monetary policy expectations. In other words, unless energy prices show a more sustained and significant decline, the inflation pressure facing the Fed and other major central banks will remain difficult to ease markedly. Although crude oil prices have retreated from recent highs, refined fuel prices remain elevated. Diesel, one of the most important fuels in transportation, has risen to historic highs. U.S. diesel prices have set a record, while European diesel prices have also climbed to multi-year highs, meaning transportation and logistics costs could still feed further into goods prices. U.S. President Donald Trump said on Tuesday that he supports considering a ban on diesel exports to lower domestic U.S. diesel prices. However, analysts warned that such a measure could disrupt global energy supply flows and have counterproductive effects. In his speech at the United Nations, Trump also warned that the United States could take further military action against Iran if no agreement is reached to end the war, while suggesting that a deal could come soon as diplomatic activity in New York continues. Michael Wan, a foreign exchange analyst at MUFG, said the good news is that oil prices have pulled back from their earlier highs, but because it remains unclear whether and when the conflict can be resolved, the future trajectory remains highly uncertain. For the foreign exchange market, oil prices and the dollar currently form an important policy transmission chain. Persistently high energy prices could push up corporate costs and consumer prices, keeping inflation at elevated levels; the more stubborn inflation is, the higher the likelihood that the Fed will keep rates high or even continue hiking, and higher U.S. rates provide support for the dollar. Several recent economic data points also show that U.S. demand remains strong. At the same time, Fed officials are increasingly focused on inflation pressures beyond energy and supply shocks, keeping the market highly alert to the possibility of further near-term rate hikes. However, if Middle East tensions ease and drive a sustained decline in oil prices, global inflation pressures could ease accordingly, and market expectations for the Fed and other major central banks could then be readjusted. As the dollar strengthened, the yen continued to come under pressure, with the dollar briefly rising to around 158 yen. The Bank of Japan last week raised its policy rate to its highest level in 31 years, but the hike still failed to fully convince investors that the BOJ will continue raising rates rapidly, leaving the yen persistently weak. At the same time, as the yen moves closer to the highly watched 160 level, investor vigilance over possible Japanese intervention in the currency market has risen again. Japanese markets were closed on Wednesday for a holiday, leaving market liquidity relatively thin. Some analysts believe that if Japanese authorities decide to act, the low-liquidity environment could amplify the effect of intervention. Kieran Williams, head of Asia FX at Intouch Capital Markets, said 160 per dollar remains a risk level worth watching, but Japanese officials appear to have recently reduced advance signals of intervention and no longer clearly act around a fixed exchange rate level, so actual intervention could come earlier or take other forms.