Dollar perched at two-month high as hot PMI fuels inflation fears, rate hike bets

HONG KONG: The dollar clung to a two-month high on Thursday after a strong manufacturing reading reignited inflation fears and rate-hike bets, while a weak Treasury auction sent yields higher across the curve, providing fresh impetus to the US currency.

The broad dollar strength pushed the euro to US$1.1378, a two-month low, while sterling languished near a three-month nadir at US$1.3231. The dollar index, which measures the US currency against a basket of peers, held near a two-month high at 101.1.

A stronger-than-expected purchasing managers' report overnight fanned new price concerns and a poorly received auction of five-year US Treasury notes triggered a fresh round of bond selling, with five-year yields crossing 5 per cent for the first time since 2007.

The backdrop of rising inflationary risks and a strong economy means the Federal Reserve is likely to deliver more rate hikes, Governor Michael Barr said on Wednesday in comments viewed by markets as "forward guidance", pushing traders to pile into bets on a second straight policy tightening next month.

"Given the relative strength of US growth and increasingly aggressive Fed rate-hike pricing, the US dollar continues to stand firm in its attraction to own," said Chris Weston, head of research at Pepperstone.

Signs the US economy may be overheating are now firmly in focus, and policymakers may need to tighten further if inflation continues to surprise on the upside, he said.

Inflation risks were also amplified by a nearly 4 per cent jump in oil prices on Wednesday after Iran's president vowed never to surrender, with markets also weighing US President Donald Trump's diesel export ban.

Traders now see a nearly 70 per cent chance of another increase when the US central bank next meets in October, according to CME Group's FedWatch Tool, up from the 50 per cent probability a week ago.

At 157.9, the Japanese yen hovered near its three-week low, with traders on alert for possible intervention after markets judged the Bank of Japan's rate hike to a 31-year high last week as insufficiently hawkish.

Data released on Thursday showed Japan's manufacturing activity rose at a slower pace in September from the previous month as output and new orders softened.

The Australian dollar fetched US$0.7035, down 0.07 per cent ahead of the latest jobs data, and the kiwi traded flat at US$0.5676.

Elsewhere, the offshore yuan traded flat at 6.7119 per dollar, as markets watched Chinese President Xi Jinping's first US visit in three years, a high-stakes meeting set to test ties as tensions linger over trade, technology, Taiwan and Tehran.