Dollar pinned at nearly two-month high amid resurgent oil prices, bond rout

The U.S. dollar on Thursday rose for a fourth straight session and remained pinned at a nearly two-month, as a fresh surge in oil prices boosted inflationary concerns and a rout in the bond market showed no signs of letting up.

At 16:57 ET (20:57 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, was up 0.2% to 101.26, its highest level since July 28.
Rising oil, yields and a hawkish Fed
Oil prices rose for a second straight session on Thursday, further undoing a five-day losing streak notched on Tuesday. The advance was driven by fading hopes for a diplomatic breakthrough between the U.S. and Iran.

President Donald Trump and his Iranian counterpart Masoud Pezeshkian have delivered fiery speeches at the United Nations (UN) General Assembly in New York this week.

The U.S. president threatened to “annihilate” Iran and “drive them into hell” or make a deal, and the Tehran official asserted that the country would “never bow” its head or “bend at the knee” while also saying it was open for “dialogue and diplomacy and negotiations.”

While indirect talks have taken place between U.S. representatives and the Iranian delegation on the sidelines of the UN, U.S. Secretary of State Marco Rubio on Wednesday said he wouldn’t characterize the discussions as a “major breakthrough” but more a “continuation of conversations that have occurred in the past.”
The two countries remain at odds over control of the Strait of Hormuz. Reuters on Thursday said that U.S. and Iranian negotiators in New York had discussed a phased path out of war that would involve Tehran reopening the strait and Washington lifting its economic blockade, citing sources close to the talks. The news helped oil prices pare gains, but the pullback was short-lived.

Meanwhile, a sell-off in the U.S. bond market continued on Thursday, with the U.S. 10-year Treasury yield climbing 8.9 basis points to 5.205%, a level not seen since July 2007.

A S&P Global report on Wednesday showed U.S. business activity accelerating for a fourth straight month in September, registering the fastest pace of growth since July 2021. A solid rise in both services and manufacturing output buoyed the headline jump.

At the same time, S&P said U.S. price pressures intensified in September, with average input costs across both goods and services jumping and the overall rate of inflation reaching its highest since October 2022. Higher fuel and transport costs were the primary drivers.

With the data showing a combination of a resilient economy and stubborn inflation, expectations for a Fed rate hike in October got a boost. As per the CME FedWatch tool, the odds of a quarter-point hike next month stand at nearly 69% versus about 55% a week ago. Higher rate environments tend to strengthen the dollar.

“Market participants seem to believe that Fed Chair Kevin Warsh is willing to hike interest rates many more times to battle inflationary pressures that are almost entirely being bolstered by energy. The Treasury complex expects four 25-basis-point benchmark increases by the end of next summer, for a total of another full percentage point,” José Torres, senior economist at Interactive Brokers, said.
“But with housing price momentum continuing to recede from both a purchaser and renter perspective, the modest effects of tariffs largely behind us and wage bills in check, it seems unreasonable for the central bank to tighten a lot more in the near term against a backdrop that is generally featuring cooling, not warming, cost forces,” he noted.

“Sure, we’re well above target; however, if it’s predominantly due to a supply shock, then the hasty repricing of monetary policy expectations currently doesn’t make much sense, as a relief in fuel charges will bring us back into the vicinity of the 2% objective,” Torres added.

Yuan in focus amid Xi’s visit to the U.S.
Turning to the other major currencies, the Chinese yuan was little changed on Thursday at 6.7128 per dollar. Earlier in the day, Trump received Chinese President Xi Jinping at the White House, in the first state visit for the Asian nation’s leader since 2015.

Trump and Xi delivered some remarks to the media, in which the U.S. president noted that teams from Washington and Beijing had been working together to “encourage a more balanced trading relationship” and that he and Xi would cooperate to “forge a better future for both of our nations.”

“I am ready to work with you to steer the giant ship of China-U.S. relationship on a steady course,” Xi said. He also welcomed “American companies wanting to invest and do business” in China, saying that the Asian nation would keep its “door wide open.”

Trade issues and AI are expected to be the two biggest topics that Trump and Xi will discuss.

Yen weakens, euro and sterling slightly lower
Elsewhere in Asia, the Japanese yen slipped against the dollar for a fifth straight session, with the USD/JPY pair last up 0.3% to 158.84. Traders returned from an extended holiday and kept an eye out for any possible intervention moves by authorities in Tokyo following recent central bank rate checks – a process where officials call commercial banks to inquire about real-time executable quotes.

The Bank of Japan’s rate hike last week was not seen as aggressive enough.

Over in Europe, the euro and sterling were muted amid the rise in the dollar, with the former just under the flatline at $1.1380 and the latter slipping 0.2% to $1.3217.