The US Dollar continued its strong performance this week, supported by rising US Treasury yields and growing expectations that the Federal Reserve may tighten monetary policy further. The US Dollar Index (DXY) reached 101.40 on Thursday, its highest level in nearly two months, before easing to 100.95 on Friday, marking a 0.30% decline for the day but still reflecting a robust weekly rally [1][3]. The benchmark 10-year US Treasury yield hovered near 5.22%, levels last seen in 2007 [1].
Fed officials maintained a hawkish tone, with New York Fed President Williams and Cleveland Fed President Hammack warning that inflation risks remain skewed to the upside, and Philadelphia Fed President Paulson stating that 'modest further tightening' may be warranted if inflation fails to moderate [2][3]. Market pricing currently implies a 66% to 70% probability of another 25-basis-point rate hike in October, according to CME FedWatch Tool and OCBC strategists [1][2].
Friday's US data offered a mixed picture. The University of Michigan Consumer Sentiment Index was revised higher to 48.1 in September from 47.8, beating expectations of 47.6, but remains well below August's 51.7 reading [1][3]. The Consumer Expectations Index increased to 46.3 from 45.8, though it declined sharply from 51.5 in the previous month [1][3]. Inflation expectations remained unchanged, with the 1-year measure at 4.6% and the 5-year at 3.4% [1][3].
The Euro and Australian Dollar both edged higher on Friday as the US Dollar paused, but remain on track for weekly declines. EUR/USD traded around 1.1400 after falling to 1.1359 on Thursday, its lowest since July 28, marking a third consecutive weekly decline for the Euro [1]. AUD/USD traded around 0.7025, up 0.20% on the day, but still faced a sharp weekly drop after approaching the 0.7000 level [3]. The Eurozone awaits next week's preliminary Harmonized Index of Consumer Prices (HICP) data, with headline inflation expected at 3.5% and core inflation at 2.6%, up from 3.2% and 2.4%, respectively [1].
Looking ahead, key US data releases including the Personal Consumption Expenditures (PCE) inflation report, ISM Manufacturing PMI, and Nonfarm Payrolls (NFP) report are expected to shape market expectations for the Fed's October meeting [1][2]. Bloomberg consensus expects non-farm payrolls to rise by 100,000 in September, down from 162,000 in August, with the unemployment rate projected to remain at 4.1% [2]. OCBC strategists note that falling jobless claims raise the risk of an upside surprise in payrolls, which could reinforce expectations for further Fed tightening [2].
CONCLUSION
The US Dollar remains supported by hawkish Fed rhetoric, elevated Treasury yields, and persistent inflation expectations, leading to weekly declines for both the Euro and Australian Dollar. Upcoming US economic data and labor market reports are likely to further influence market sentiment and rate hike expectations. Investors are closely watching these developments, as the probability of another Fed rate hike in October remains high.