Key facts
- The US dollar index reached a two-month high of 101.1 on Thursday.
- Stronger-than-expected US manufacturing data reignited inflation fears.
- A poorly received auction of five-year US Treasury notes triggered bond selling.
- Federal Reserve Governor Michael Barr signaled further rate hikes are likely.
- Traders are pricing in a nearly 70% chance of a Fed rate hike in October.
The US dollar held near a two-month high on Thursday, buoyed by renewed inflation fears and expectations of further Federal Reserve rate hikes. A stronger-than-expected purchasing managers' index report fanned price concerns, while a weak auction of five-year US Treasury notes triggered bond selling, pushing yields above 5% for the first time since 2007.
Federal Reserve Governor Michael Barr's comments were viewed by markets as forward guidance, suggesting more tightening may be necessary if inflation continues to rise. This has increased traders' bets on another rate increase at the Fed's next meeting in October, with probabilities now nearing 70%.
The dollar's strength pushed the euro to a two-month low of $1.1378 and sterling to a three-month nadir at $1.3231. Inflation risks were also amplified by a nearly 4% jump in oil prices on Wednesday.
In Japan, the yen hovered near a three-week low at 157.9 per dollar, with traders watching for potential intervention after the Bank of Japan's recent rate hike was deemed insufficiently hawkish. Data showed Japan's manufacturing activity slowed in September.