• Dollar extends gains on ‘higher for longer’ narrative

• Dollar/yen nears 150 zone, risk of intervention rises

• Oil skyrockets as US inventories tumble

• Wall street closes mixed despite rally in yields

The US dollar continued marching north against all but one of the other major currencies on Wednesday, gaining the most against the euro and losing only versus the Canadian dollar, which may have received support from the surge in oil prices.

The Fed’s ‘higher for longer’ mentality continues to be the main catalyst behind the dollar’s strength, with Minneapolis Fed President Neel Kashkari reiterating hawkish remarks for a second straight day yesterday. Speaking on CNBC, he said that he cannot say interest rates reached the level at which they could get inflation back to 2%, adding that he expects the Fed to hold rates steady next year after another final rate hike before the end of this year.

US Treasury yields extended their rally, with the 10-year benchmark rate hitting a fresh 16-year high, while the dollar pushed the euro and the pound to six-month lows.

Dollar/yen hit an 11-month high, despite fresh intervention warnings by Japan’s Finance Minister Shunichi Suzuki, who said today that they will not rule out any options to deal with excessive currency volatility.

With the pair getting around 30 pips shy from hitting the psychological zone of 150.00, which is considered by many as the red line that could trigger action, the increasing frequency of verbal warnings and the positive outlook of the dollar are more than alarming.

Having said that though, even in the case of intervention, the outlook for the pair is unlikely to turn bearish. The divergence between the Fed and the BoJ may further widen the gap between US and Japanese government bond yields, and thus, any declines in dollar/yen due to intervention may be seen by market participants as an opportunity to reenter long positions at more attractive levels.

Oil prices surged around 3.5% yesterday and extended their rally today as data showed that US crude stocks fell by nearly 2.2mn barrels last week, far exceeding expectations of a 320k barrel drop. Stockpiles at Cushing, Oklahoma, fell to the lowest since July 2022, closer to historic lows, raising concerns of declines below minimum operating levels.

The tumble in US inventories comes on top of Saudi Arabia's and Russia’s decision to extend their production cuts until the end of the year. Heading into winter, worries about supply tightness may continue pushing prices north, but whether this will evolve into a long-lasting uptrend is questionable. The challenges facing China and Europe, the two largest oil consumers in the world behind the US, could further dent demand, something that may start being reflected in prices at some point in the future.

Despite the surge in Treasury yields and the dollar’s gains, Wall Street ended Wednesday’s session mixed. Although the Dow Jones slid somewhat, the S&P 500 finished virtually unchanged, while the Nasdaq added some gains. Perhaps some investors were tempted to start bargain hunting after the steep sell-off the market saw in the last couple of weeks.

That said, the risk of further declines remains firmly on the table. The market’s implied rate path is still below the Fed’s own projections, which leaves room for upside adjustment should future data continue to corroborate the ‘higher for longer’ narrative. This could lend more support to Treasury yields and the dollar, and thereby weigh on equities. Another source of uncertainty remains the stalemate in the US Congress over the federal budget.

Gold was also hurt badly by the rally in yields and the dollar, falling below the key support zone of $1,885 and entering territories last tested in March.