The dollar held near a two-month high as stronger-than-expected U.S. manufacturing data revived inflation fears and rate-hike bets; a weak Treasury auction also lifted yields. Traders put the odds of an October Fed hike at nearly 70%, up from 50% a week earlier.
A poorly received auction of five-year U.S. notes triggered bond selling; five-year yields crossed 5% for the first time since 2007. Fed Governor Michael Barr said Wednesday that the strong economy and rising inflation risks made more rate hikes likely, in remarks markets viewed as “forward guidance.” Oil prices rose nearly 4% Wednesday after Iran’s president vowed never to surrender, while markets also weighed President Donald Trump’s diesel export ban.
The dollar index was around 101.1, a two-month high; the euro fell to $1.1378, a two-month low, and sterling traded near $1.3231, a three-month low. The yen hovered at 157.9, near a three-week low, with traders alert to possible intervention after markets judged last week’s Bank of Japan rate hike insufficiently hawkish. Japan’s manufacturing activity grew more slowly in September as output and new orders softened.
