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US Dollar Hits Two-Month High on Rate Hike Bets; Aussie Dollar Slides
Summary
The U.S. dollar maintained its strength near a two-month peak, fueled by soaring Treasury yields and expectations of further Federal Reserve tightening. The Australian dollar fell to its lowest level since August, even after its central bank raised interest rates as expected.
The U.S. dollar held near a two-month high against a basket of major currencies on Tuesday, as surging U.S. Treasury yields and expectations for further monetary tightening by the Federal Reserve continued to dominate foreign exchange markets.
Dollar Dominance on Yield Surge
The U.S. Dollar Index (DXY), which measures the greenback against six peers, edged up 0.1% to 101.30, after touching an intraday high of 101.33. The index is on pace for a 1.9% monthly gain for September, driven largely by a sell-off in U.S. government bonds that has pushed yields to multi-decade highs.
The benchmark 10-year U.S. Treasury yield remained near its highest level since July 2007 at 5.23%, while the 30-year yield hovered around 5.55%, a peak not seen since 2004. According to the source, money markets are now pricing in a more than 70% probability of a 25-basis-point interest rate hike by the Federal Reserve in October, widening the yield differential in the dollar's favor.
Aussie Dollar Falters Despite RBA Hike
The Australian dollar came under significant pressure, falling 0.4% to $0.6989 and breaking below the key psychological level of $0.7000 to hit its lowest point in nearly two months. The decline occurred despite the Reserve Bank of Australia (RBA) delivering an expected 25-basis-point rate hike, lifting its cash rate to a 15-year high of 4.60%.
AdWhile RBA Governor Michele Bullock warned of persistent inflationary pressures, the rate increase was already fully priced in by the market. Traders instead focused on the narrowing yield advantage of Australian bonds over their U.S. counterparts, creating headwinds for the Aussie dollar.
Yen and Euro Weaken
Elsewhere, the Japanese yen slipped back towards multi-week lows, trading at 157.41 per dollar. The wide interest rate gap between the U.S. and Japan continues to incentivize short positions against the yen, despite recent verbal warnings from Japanese officials, including chief currency diplomat Atsushi Mimura, against disorderly currency moves.
The euro remained largely range-bound but edged lower as market participants positioned for key U.S. economic data later in the week. Investors are awaiting the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation measure, on Wednesday, followed by the September nonfarm payrolls report on Friday. Stronger-than-expected readings could solidify bets on another Fed rate hike, potentially adding further pressure on non-dollar currencies.
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