Dollar jumps to near two-month high on Fed outlook, oil climb

NEW YORK, Sept 23 : The US dollar rose to its highest level in nearly two months on Wednesday as investors priced in a rate hike cycle from the Federal Reserve, while oil prices jumped as comments from Iran cast doubt on progress in peace talks.

In the wake of the central bank's rate hike last week, comments from several Federal Reserve officials have also flagged the possibility of more rate increases if inflation does not cool.

On Wednesday, Federal Reserve Governor Michael Barr said the US central bank took an important step last week to "recalibrate" short-term borrowing costs to bring down inflation, and will likely need to deliver further interest rate hikes.

"It's a rate story right now," said Elias Haddad, global head of markets strategy at Brown Brothers Harriman in London.

"What's driving the dollar higher is a follow through from the hawkish Fed hike that we got last week and that's just given the dollar some renewed momentum. This week there hasn't been much data, or policy relevant data, but what was interesting is the comments from Fed officials, they're basically all toeing the same line that more tightening is in the pipeline."

The dollar extended gains after S&P Global said its flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 58.4 this month, its highest since July 2021, after a 56.0 reading in August, powered by a surge in new orders, though strong demand strained supply chains and pushed prices higher.

The dollar index, which measures the greenback against a basket of currencies, rose 0.54 per cent to 101.09 after hitting 101.1, its highest since July 29.

Expectations the Fed will hike rates by at least 25 basis points at its October meeting shot up to about 75 per cent after the data, according to LSEG data, up from roughly 53 per cent before the release.

Further fueling gains in the greenback was a rise in oil prices, after Mohsen Rezaei, secretary of Iran's Supreme National Security Council, said in an interview with state TV that as long as Iran's conditions are not met, the Strait of Hormuz would not be reopened and there would be no negotiations.

Hopes that diplomacy at the UN General Assembly could lead to a resolution to the seven-month-long Middle East war had helped push oil prices lower since reaching a four-month high in mid-September, but have since reversed course this week.

The euro was down 0.52 per cent at $1.1386 and on pace for its third straight daily decline. Earlier S&P Global Flash Euro Zone Composite PMI Output Index data showed the region's economy is showing unexpected signs of health even as conflicts in the Middle East and Ukraine drive up energy costs for firms and households.

Investors are also waiting for a high-stakes meeting between Trump and Chinese President Xi Jinping as the two leaders seek stability in a relationship as the superpowers' tensions over trade, technology and Tehran will play out. The dollar strengthened 0.20 per cent to 6.712 versus the offshore Chinese yuan.

The Japanese yen weakened 0.6 per cent against the greenback to 158.32 per dollar as traders remain wary of the threat of intervention after the Bank of Japan's rate hike to a 31-year high last week fell short of reassuring investors that more increases may be on the way.

Japanese markets are closed for a holiday and this period of lower liquidity makes it a higher probability for authorities to intervene, according to analysts.