Dollar perched at two-month high as hot PMI fuels inflation fears, rate hike bets

The US dollar reached a two-month high on Thursday, fueled by strong manufacturing data that reignited concerns about inflation and heightened expectations of interest rate hikes, according to wire reports. Treasury yields surged across the curve following a poor performance in a recent auction, further bolstering the dollar's ascent.

The euro fell to a two-month low against the greenback, while the British pound hit near a three-month low. The dollar index, which tracks the US currency's performance against a basket of peers, hovered near a two-month high of 101.1.

Inflation concerns intensified after a purchasing managers' report exceeded expectations, prompting speculation of additional Federal Reserve rate hikes. Governor Michael Barr indicated on Wednesday that more tightening was likely, as traders anticipated a second consecutive policy tightening next month. Chris Weston, head of research at Pepperstone, remarked on the US dollar's resilience, attributing its strength to robust US economic growth and aggressive Fed rate-hike pricing.

He noted that policymakers might need to implement further tightening measures if inflation continues to exceed expectations.

The potential for further rate hikes was heightened by a sharp increase in oil prices, driven by Iran's president's vow to maintain resistance. Markets also factored in the impact of President Donald Trump's diesel export ban. The probability of a further interest rate increase at the Federal Reserve's upcoming October meeting rose to nearly 70%, as per CME Group's FedWatch Tool, up from 50% a week prior.

Against the backdrop of the dollar's strength, the Japanese yen slipped to a three-week low, with traders wary of potential intervention by the Bank of Japan. Japan's manufacturing sector showed a slower-than-expected expansion in September, with output and new orders weakening. The Australian dollar slipped slightly to $0.7035, while the New Zealand dollar remained flat at $0.5676.

The offshore yuan also held steady at 6.7119 per dollar, as market observers watched President Xi Jinping's first visit to the United States in three years, a pivotal meeting set to scrutinize ties amid ongoing disputes over trade, technology, Taiwan, and Iran.