Dollar Hits Two-Month High as Strong Data, Yield Surge Revive Fed Hike Bets

The U.S. dollar climbed to a two-month high on Thursday, marking its fourth consecutive day of gains as strong economic indicators and soaring energy prices reignited global inflation concerns, prompting markets to reprice expectations for higher interest rates.

Surging Yields and Hawkish Fed Fuel Dollar's Ascent

The U.S. Dollar Index, which measures the greenback against a basket of major currencies, hovered near 101.09 after touching an intraday high of 101.20. The rally was underpinned by a sharp rise in U.S. Treasury yields after stronger-than-expected manufacturing data was followed by weak demand for a $70 billion government debt auction. The five-year Treasury yield subsequently broke above 5% for the first time since 2007, providing significant support for the dollar.

Hawkish commentary from Federal Reserve Governor Michael Barr further bolstered the currency. According to the CME FedWatch Tool, money markets are now pricing in a nearly 70% probability of an interest rate hike in October, a substantial increase from 50% just a week ago.

Major Currencies Under Pressure

The euro faced sustained pressure during European trading, falling for a fourth straight session to its lowest level since late July at approximately $1.1420. The single currency has been weakened by both the widening interest rate differential between the U.S. and the Eurozone and the rising cost of energy.

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Brent crude oil prices settled firmly above $103 per barrel, reportedly after Iranian President Masoud Pezeshkian vowed Tehran would "not compromise" amid a U.S. maritime blockade. Persistently high oil prices threaten to add cost-push inflation pressure on European economies, complicating the European Central Bank's monetary tightening path.

In Asia, the Japanese yen fell for a fifth consecutive day, with the dollar climbing to 157.94 yen. The yen's weakness persisted despite the 10-year Japanese government bond yield hitting a three-decade high of 3.06%. Market participants remain on high alert for direct currency intervention by Japanese authorities, particularly if the dollar breaks the key 158.00 yen threshold.

Cautious Tone in Asian Markets

Across emerging Asian markets, currencies traded cautiously as investors awaited a high-level bilateral meeting between Chinese and U.S. leaders in Washington. The Chinese yuan was stable near 6.72 per dollar amid expectations of an extension to a U.S.-China tariff truce.

Elsewhere, the South Korean won slipped 0.5% in thin holiday trading. The Indonesian rupiah fell 0.6% to 17,903.5 per dollar, as the economies of energy-importing nations like Indonesia face pressure from elevated crude prices.