The US Dollar has strengthened notably, supported by a surge in US Treasury yields and reinforced by hawkish Federal Reserve rhetoric. According to MUFG’s Derek Halpenny, the sell-off in US fixed income has led to global bond weakness and higher yields across the curve, with the US Dollar advancing further as a result [1]. A poor 5-year US Treasury auction saw $70 billion in bonds sold at a yield of 5.033%, the highest since June 2006, and a bid-to-cover ratio of 2.21, below the six-month average of 2.33 [1].
Economic data has also played a key role in supporting the Dollar. Both US Manufacturing and Services PMIs for September surged, encouraging the Fed to maintain its hawkish stance, while the Global Composite PMI rose to 58.4, the highest since July 2021 [1]. The latest Flash US S&P Global PMI data showed manufacturing expanding higher than expected at 52.0, helping to offset minor pullbacks in composite and services activity [2].
The US Dollar Index (DXY) is gaining for the fourth consecutive day, trading around 101.20 during European hours on Thursday [2]. Technical analysis indicates a bullish bias, with the DXY above both the nine-period EMA (100.43) and the 50-period EMA (99.85), and a 14-day RSI at 72.34 signaling overbought conditions but no clear reversal [2]. The FXSFedSentiment Index at 148.81 further reinforces a pro-dollar backdrop [2].
Market expectations for a 25-basis-point Fed rate hike in October have surged to nearly 69%, up from 55.4% a day ago, as several Fed officials continue to support recent rate increases and warn against persistent inflation risks [2]. Societe Generale strategists note that the US 10-year Treasury yield has crossed its 2023 peak of 5.02%, extending its uptrend and challenging the upper boundary of a multi-month ascending channel, though they caution the move appears stretched [2].
Additional factors such as rising Brent Oil prices and potential US diesel export bans are adding to inflation risks, further supporting the Dollar and threatening carry trades, particularly in a low FX volatility environment. High-yielding emerging market currencies are seen as most vulnerable, while the yen and Swiss franc could outperform in the event of a carry unwind [1].
CONCLUSION
The US Dollar is experiencing strong upward momentum driven by higher Treasury yields, robust economic data, and increased expectations of further Fed rate hikes. Technical and sentiment indicators suggest the bullish trend remains intact, though some signals point to stretched conditions. Market participants are closely watching upcoming data releases and Fed communications for further direction.