US dollar perched at 2-month high as hot PMI fuels inflation fears

On Thursday, the US dollar reached a two-month high as a robust manufacturing report revived concerns about inflation and the likelihood of rate hikes. The euro and British pound both dropped to their respective two- and three-month lows against the dollar. The dollar index hovered near a two-month peak at 101.1. A solid purchasing managers' index fueled fresh inflation worries, while a poorly received auction of five-year US Treasury notes spurred additional bond selling, with yields crossing the 5% threshold for the first time since 2007.

Fed Governor Michael Barr indicated on Wednesday that the Federal Reserve may issue more rate hikes, seen by markets as forward guidance, leading traders to bet on another tightening next month. Chris Weston, head of research at Pepperstone, noted that the US dollar remains an attractive asset due to the country's strong economy and aggressive Fed rate-hike expectations.

Rising inflation risks, coupled with the US economy's robust performance, have put policymakers under pressure to tighten further if inflation persists in rising. Inflation concerns were exacerbated by a 4% surge in oil prices following Iran's president's vow to never yield, as well as US President Donald Trump's diesel export ban.

The Japanese yen hovered near a three-week low at 157.9, with traders watching for possible intervention after the Bank of Japan's rate hike to a 31-year high last week was deemed insufficiently hawkish. In Japan, manufacturing activity grew at a slower pace in September from the previous month, as output and new orders cooled. The Australian dollar slipped to US$0.7035, while the New Zealand dollar remained flat at US$0.5676.

Meanwhile, the offshore yuan stayed steady at 6.7119 per dollar, as markets monitored Chinese President Xi Jinping's first US visit in three years, a crucial meeting that could test ties amid ongoing tensions over trade, technology, Taiwan, and Iran.