The US Dollar (USD) extended its recent gains, supported by widening US-G6 two-year bond yield spreads and resilient US economic data, which have kept Federal Reserve (Fed) rate hike expectations alive in the near term [1]. In European trading, the US Dollar Index (DXY) rose 0.2% to near 99.86, with 10-year US Treasury yields reaching a fresh high of 4.82%, the highest level since November 2023 [2]. The USD was notably strongest against the New Zealand Dollar, appreciating by 1.28% [2].
US manufacturing sector growth momentum eased more than expected in August, with the headline index dipping to a two-month low at 54.6 (consensus: 55.2) versus 55.6 in July, driven by slower expansions in both the New Orders and Employment indexes. However, price pressures persisted, as the Prices Paid index held at 71.1 for a second straight month, signaling ongoing upside inflation risks [1]. The JOLTS July survey indicated a low hire, low fire labor market, with the hiring rate falling to 3.2%, the lowest since February, and the layoffs rate dipping to 1.0% [1].
Analysts at OCBC highlighted that renewed escalation in the Middle East has revived inflation fears, contributing to a fresh rise in global bond yields and a stronger USD. This has been accompanied by a bearish flattening of the US yield curve and lower gold prices, as markets moved to fully price in a 25 basis point Fed rate hike by October [2]. Fed Governor Michael Barr reinforced the hawkish policy stance, stating that further rate increases may be warranted if inflation fails to moderate, echoing Chair Warsh's message at Jackson Hole [2]. The CME FedWatch tool indicates a 67% probability of a Fed rate hike at this month's policy meeting [2].
Investors are awaiting the US ADP Employment Change data for August, with consensus estimates pointing to 47,000–48,000 new jobs, slightly above July's 44,000 [1][2]. The Fed Beige Book is also expected to provide fresh insights into the US growth and inflation outlook later in the day [1]. Looking ahead, the major trigger for the US Dollar this week will be the Nonfarm Payrolls (NFP) data for August, scheduled for release on Friday [2].
Despite the current strength, some analysts caution that further upside for the USD may be capped as other major central banks also tighten policy, limiting monetary policy divergence and reducing the likelihood of new cyclical highs for the currency [1].
CONCLUSION
The US Dollar has rallied on the back of surging Treasury yields, persistent inflation risks, and hawkish Fed expectations, with markets increasingly pricing in a rate hike this month. However, analysts note that tightening by other central banks may limit further USD gains. Upcoming employment data, including the ADP and Nonfarm Payrolls reports, will be key for the Dollar's near-term direction.