The U.S. dollar climbed to its highest level in more than three months on Thursday, supported by another rise in U.S. Treasury yields.
Higher bond yields have been driven in part by concerns that global inflation could remain elevated, particularly as energy prices stay under pressure from geopolitical tensions in the Middle East.
At the same time, softer U.S. inflation data reduced expectations for an immediate Federal Reserve rate increase.
U.S. Inflation Comes in Below Expectations
Recent U.S. inflation figures showed that price growth in August was weaker than expected.
July’s inflation reading was also revised lower, prompting traders to reduce bets on another Federal Reserve rate hike this month.
However, higher inflation in the euro zone highlighted the continued risk posed by elevated energy costs.
This has kept investors cautious about the global inflation outlook.
Dollar Index Reaches Three-Month Peak
The U.S. Dollar Index rose to around 101.66, its strongest level since June 25.
The greenback also gained about 2% during September, supported by higher Treasury yields and broad weakness across major rival currencies.
Ray Attrill, head of foreign exchange strategy at National Australia Bank, said the dollar is currently reacting more strongly to movements in longer-term Treasury yields than to expectations surrounding the next Federal Reserve rate decision.
As long as bond yields remain elevated, the dollar could continue to receive support.
Euro Extends September Losses
The EUR/USD pair fell around 0.1% to approximately $1.13 during Asian trading.
The euro lost nearly 2.5% in September, marking its weakest monthly performance since July 2025.
Concerns over European government debt, rising energy costs and stronger inflation have weighed on the currency.
Higher euro-zone inflation has also increased uncertainty over the European Central Bank’s future policy path.
Pound Pressured by Stronger Dollar
The British pound also weakened against the U.S. currency.
Sterling slipped around 0.1% to approximately $1.325 after falling more than 2% during September.
The decline has largely reflected broad U.S. dollar strength rather than a major shift in UK-specific economic conditions.
Treasury Yields Remain Near Multi-Year Highs
Global bond markets experienced one of their steepest monthly declines in years during September.
Concerns over government finances, heavy bond issuance and persistent inflation pushed yields sharply higher.
Shorter-term U.S. Treasury yields eased slightly as traders reduced expectations for a near-term Fed hike.
However, 10-year and 30-year Treasury yields remained close to fresh multi-year highs, continuing to provide support for the dollar.
Dollar Gains Against Japanese Yen
The dollar also strengthened against the Japanese yen, with USD/JPY rising to around 158.29.
The move followed a strong month for the yen, which had outperformed several major currencies during September.
Market participants remain cautious about the possibility of intervention by Japanese authorities if the yen weakens too quickly.
Meanwhile, a summary from the Bank of Japan’s September meeting showed that some policymakers favored faster interest rate increases or moving rates closer to the central bank’s longer-term objective.
Australian and New Zealand Dollars Weaken
The Australian dollar fell to a two-month low near $0.6940.
Investors reduced expectations for another near-term Reserve Bank of Australia rate increase after domestic inflation came in slightly below forecasts.
The New Zealand dollar also weakened, falling to its lowest level since November 2025 at around $0.562.
Both currencies remained under pressure from the strong U.S. dollar and elevated global bond yields.
Dollar Outlook Remains Tied to Treasury Yields
For now, the outlook for the U.S. dollar remains closely linked to Treasury yields.
A continued rise in long-term borrowing costs could provide further support for the greenback, particularly if higher yields begin to weigh on global equity markets.
However, softer U.S. inflation and changing expectations around Federal Reserve policy could limit further gains if bond yields begin to retreat.
