Dollar Hits Two-Week High as Surging Treasury Yields Fuel Fed Rate Hike Bets

The U.S. dollar extended its recent gains on Tuesday, hovering near a two-week peak as a global sovereign debt sell-off pushed benchmark bond yields to multi-year highs. The move solidified market expectations for the Federal Reserve to resume interest rate hikes at its upcoming September policy meeting.

U.S. Yields Propel Dollar Higher

The U.S. Dollar Index, which measures the greenback against a basket of major currencies, edged up 0.16% in Tuesday trading. The dollar's strength follows a significant repricing of U.S. interest rate expectations after a hawkish keynote speech by Federal Reserve Governor Kevin Warsh at the Jackson Hole symposium.

Following the remarks, the yield on the benchmark 10-year U.S. Treasury note rose 3 basis points to 4.80%, a level not seen since January 2025. According to Investing.com, money market swaps now indicate an approximate 74% probability of a 25-basis-point rate increase at the Fed's September 17 meeting, up sharply from 34% before the speech. This widening interest rate differential is weighing on lower-yielding currencies.

Major Currencies Under Pressure

The broad-based dollar strength has impacted other major currencies, with domestic factors in Europe and Japan adding to the pressure.

Euro Falters on Divergent Inflation

The euro weakened by 0.20% to $1.1592, weighed down by a mixed inflation report that complicates the European Central Bank's (ECB) policy path. Preliminary data from Eurostat showed:

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• Headline Consumer Price Index (CPI) for August accelerated to 3.3% year-over-year, up from 2.9% in July.
• Core CPI, which excludes volatile items like energy and food, unexpectedly slowed to 2.4% from 2.5% previously.

This divergence between rising headline inflation and softening core price pressures presents a challenge for the ECB ahead of its own September policy decision.

Yen Nears 160 Amid Rate Hike Pressure

The Japanese yen traded near the psychologically important 160 per dollar level, a threshold that has previously prompted joint intervention from Tokyo and Washington. The yen found brief support after U.S. Treasury Secretary Scott Bessent, in a rare public comment on another nation's monetary policy at a G20 meeting, directly called for the Bank of Japan (BOJ) to raise interest rates.

Bessent's comments pushed the market-implied probability of a BOJ rate hike at its September 17-18 meeting to nearly 88%. In response, the yield on the 10-year Japanese Government Bond (JGB) climbed 5 basis points to 3.000%, a thirty-year high. However, analysts caution that the yen will likely remain under pressure from high U.S. yields if the BOJ fails to act.

Market Focus Shifts to U.S. Labor Data

Traders are now awaiting a series of key U.S. economic reports to gauge the health of the labor market. The JOLTS job openings report is due later on Tuesday, followed by the ADP private sector employment data on Wednesday and the official Non-Farm Payrolls (NFP) report on Friday. Next week's U.S. CPI data for August will be the final critical input before the Fed's September rate decision.