The US dollar edged higher on Thursday, reaching its strongest level since late June as elevated Treasury yields and weakness in the yen supported the currency.
Ten- and 30-year yields remain close to multi-decade highs as Middle East tensions sustain energy-driven inflation risks, while concerns over the US fiscal outlook continue to support the long end of the curve.
While expectations for an October Federal Reserve interest rate hike declined, the dollar and yields continue to find support as additional increases are expected later on.
The probability of an increase in October retreated below 40% following a softer-than-expected August core PCE reading and comments from New York Fed President John Williams that there is no urgency to tighten further.
Markets now price only one hike by year-end, and further tightening through mid-2027 remains expected, keeping two-year yields close to recent highs. Minneapolis Fed President Neel Kashkari provided a counterweight to his colleague’s softer messaging, arguing that inflation remains too high despite the latest data.
The yen has added another source of support. The Bank of Japan’s latest summary of opinions maintained a hawkish bias but fell short of expectations for a stronger tightening signal, placing renewed pressure on the Japanese currency.
Today’s ISM manufacturing data and weekly jobless claims provide the next test for the dollar and US Treasuries. Strong readings could rebuild October interest rate hike expectations and lift yields, extending the dollar’s advance, while weaker data would reinforce expectations that the Fed can afford to wait. Upcoming Federal Reserve speeches could amplify either move, depending on whether officials lean closer to Kashkari’s inflation concerns or Williams’ more patient stance.
The Treasury buyback programme is another risk. Previous operations have done little to prevent longer-dated yields from rising, but larger interventions could still influence direction at the long end of the curve. Beyond today’s releases, attention will quickly shift to Friday’s non-farm payrolls. A resilient labour market would support the case for further tightening, while weakness would strengthen expectations for a slower and less aggressive Fed path.
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