The US dollar remained close to a two-month high on Tuesday as rising Treasury yields and expectations of further Federal Reserve tightening continued to support the currency.
The US Dollar Index, which measures the greenback against six major currencies, gained 0.1% to 101.30 after reaching an intraday high of 101.33.
The index is on course to end September with a gain of around 1.9%.
Treasury Yields Continue to Support the Dollar
Higher US bond yields remain a major factor behind the dollar’s strength.
The benchmark 10-year Treasury yield stayed near 5.23%, its highest level since July 2007. Meanwhile, the 30-year Treasury yield traded close to 5.55%, around its strongest level since 2004.
A continued sell-off in US government debt has pushed yields sharply higher and strengthened the appeal of dollar-denominated assets.
Money markets are also pricing in a probability of more than 70% that the Federal Reserve will raise interest rates by 25 basis points in October.
As a result, interest-rate differentials continue to favor the US dollar against several major European and Asian currencies.
Australian Dollar Falls Despite RBA Rate Hike
The Australian dollar came under heavy selling pressure, dropping around 0.4% to $0.6989.
The currency fell below the key $0.7000 level and reached its weakest point in nearly two months.
The decline came even after the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.60%, the highest level in 15 years.
RBA Warns About Persistent Inflation
The RBA’s fourth rate increase of the year was approved unanimously.
Governor Michele Bullock highlighted persistent underlying inflation, rising energy costs and weak productivity growth as key risks to price stability.
However, the rate increase had already been fully priced into financial markets. This limited support for the Australian dollar following the decision.
Traders instead focused on Australia’s weakening yield advantage compared with rapidly rising US borrowing costs.
Japanese Yen Weakens Toward 157.40
The Japanese yen also weakened, trading near 157.41 against the US dollar.
The currency remains under pressure because of the wide interest-rate gap between Japan and the United States, which continues to encourage bearish positions in the yen.
The yen had briefly strengthened to 156.51 on Monday after Japan’s top currency diplomat, Atsushi Mimura, warned markets about excessive and disorderly exchange-rate movements.
Japan Signals Concern Over Yen Weakness
Japanese officials have continued to signal concern about the yen’s depreciation.
Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama have also discussed currency weakness, while cooperation between Japanese and US authorities remains in focus.
Despite these warnings, traders continue to test how far Japanese authorities may be willing to go to support the currency.
Euro Remains Under Pressure Ahead of US Data
The euro also traded slightly lower as investors prepared for several important US economic reports.
Markets are focused on the upcoming US Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation measure.
Investors are also awaiting the September nonfarm payrolls report.
Stronger-than-expected inflation or employment data could reinforce expectations for another Federal Reserve rate increase.
That scenario could provide further support for the US dollar while keeping the euro, Australian dollar, Japanese yen and other major currencies under pressure heading into the fourth quarter.
