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How OPEC+ Production Cuts Boosted the Dollar and Oil Prices

3 April: The U.S. dollar rose against its major peers as inflation fears returned after a surprise decision by leading oil producers to reduce their output further, with investors betting that the Federal Reserve may have to hike interest rates at its next meeting.

The decision from the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, came after data on Friday showed that U.S. consumer spending increased modestly in February after jumping the previous month, with inflation showing some signs of easing even as it remained high.

“Although the broader contagion risks have receded, China has shown positive developments and the Fed is expected to be close to the end of the tightening cycle, the oil price rise due to the unexpected production cut is a new risk to inflation,” said Christopher Wong, a currency strategist at OCBC in Singapore.

“New inflation risks mean that the fight against inflation is not over.”

The euro fell 0.44% to $1.0791, after hitting a one-week low of $1.0788, while the Japanese yen lost 0.46% to 133.41 per dollar. The British pound was $1.2277, down 0.45% on the day. The dollar gained 0.32% against the Swiss franc.

The dollar index , which tracks the U.S. currency against six rivals, was 0.078% higher at 103.01, breaking above 103 for the first time in a week.

The OPEC+ cuts caused oil price increases of more than 6% on Monday.

The cuts were announced even before a virtual meeting of the OPEC+ ministerial panel, which includes representatives from Saudi Arabia and Russia, that was supposed to maintain cuts of 2 million barrels per day (bpd) until the end of 2023.

Instead, the oil producers on Sunday announced additional output cuts of around 1.16 million bpd.

The two-year U.S. Treasury yield, which usually moves in line with interest rate expectations, was up 4.6 basis points at 4.108%.

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