Dollar Holds Two-Month High as Strong PMI Revives Inflation and Rate-Hike Bets
The dollar stayed near a two-month high after strong US manufacturing data and a poorly received Treasury auction reignited inflation fears and rate-hike expectations.
The US dollar remained near a two-month peak on Thursday, supported by a stronger-than-expected manufacturing survey and a weak five-year Treasury auction that drove yields higher across the curve.
The dollar index, which tracks the greenback against a basket of major peers, held around 101.1. The euro slipped to $1.1378, a two-month low, while sterling hovered near a three-month trough of $1.3231.
The manufacturing reading, released overnight, renewed concerns about price pressures. A poorly received sale of five-year US Treasury notes then triggered fresh bond selling, pushing five-year yields above 5% for the first time since 2007.
Federal Reserve Governor Michael Barr said on Wednesday that rising inflation risks and a strong economy meant more rate increases were likely. Markets read the remarks as forward guidance and increased bets on a second consecutive tightening at the central bank's next meeting in October. Traders now assign a nearly 70% probability to another hike, up from 50% a week earlier, according to CME Group's FedWatch Tool.
"Given the relative strength of US growth and increasingly aggressive Fed rate-hike pricing, the US dollar continues to stand firm in its attraction to own," said Chris Weston, head of research at Pepperstone. He added that signs of overheating in the US economy were in focus and that policymakers may need to tighten further if inflation keeps surprising on the upside.
Inflation worries were compounded by a nearly 4% jump in oil prices on Wednesday after Iran's president vowed never to surrender, with markets also weighing US President Donald Trump's diesel export ban.
The Japanese yen traded at 157.9, close to a three-week low, as traders watched for possible intervention after judging the Bank of Japan's rate hike to a 31-year high last week as insufficiently hawkish. Data on Thursday showed Japan's manufacturing activity expanded at a slower pace in September as output and new orders softened.
The Australian dollar fetched $0.7035, down 0.07% ahead of jobs data, while the New Zealand dollar was flat at $0.5676. The offshore yuan held steady at 6.7119 per dollar as markets monitored Chinese President Xi Jinping's first US visit in three years, a high-stakes meeting set to test ties amid lingering tensions over trade, technology, Taiwan and Tehran.