Dollar Holds Near Two-Month High as Treasury Yields and Global Inflation Weigh on Markets

BY COMFORT OGBONNA

The U.S. dollar held near a two-month high Thursday as rising Treasury yields continued to support the currency, while investors assessed conflicting inflation signals from the United States and Europe and the impact of higher energy prices linked to the war in the Middle East.

The dollar’s strength came despite data showing U.S. inflation increased less than expected in August. The figures, combined with downward revisions to the previous month’s reading, reduced expectations that the Federal Reserve would raise interest rates again at its October meeting.

However, concerns over persistent global price pressures continued to support U.S. Treasury yields and limit the dollar’s decline. Investors are also watching the effect of higher energy costs on inflation, particularly as uncertainty surrounding the Middle East conflict threatens to keep crude oil prices elevated.

The euro was marginally lower at $1.1330 in early Asian trading after falling nearly 2.5% in September, its largest monthly decline since July 2025. Concerns over Europe’s energy costs and government debt have added pressure to the common currency.

Sterling was little changed at $1.3264 after declining 2.1% in September. The British pound, like the euro, has faced pressure from a stronger U.S. dollar and broader concerns about the outlook for global interest rates.

The dollar index, which measures the currency against a basket of major currencies, remained close to a two-month high at 101.48. It gained about 2% in September.

The latest U.S. inflation data provided some relief for investors concerned about an immediate increase in borrowing costs. The figures suggested that price pressures were not accelerating as quickly as previously feared, giving markets room to scale back expectations for another Federal Reserve rate increase.

However, analysts cautioned that the data did not eliminate the possibility of further rate increases. The Federal Reserve has continued to monitor inflation closely, particularly as higher energy prices could put renewed pressure on consumer prices.

The dollar’s recent performance has also been closely linked to movements in the U.S. Treasury market. While expectations for an immediate rate increase have weakened, longer-term Treasury yields have continued to rise, providing support for the dollar.

Global bond markets experienced a particularly difficult September, with government bond prices falling sharply and yields rising. Investors have been concerned about worsening government finances, increased debt issuance and renewed inflation pressures.

The reduction in expectations for a Federal Reserve rate increase this month led to a modest decline in shorter-term Treasury yields. Longer-dated yields, however, continued to climb, with 10-year and 30-year Treasury yields reaching fresh highs during overnight trading.

The Japanese yen weakened about 0.2% to 157.82 per dollar on Thursday, although it gained nearly 1.5% in September.

The yen’s monthly advance came as traders remained alert to the possibility of intervention by Japanese authorities to prevent excessive weakness in the currency. The currency’s movements have also been influenced by expectations surrounding the Bank of Japan’s monetary policy.

A summary of opinions from the Bank of Japan’s September meeting showed that some policymakers believed the central bank may need to accelerate interest rate increases or move rates closer to its policy objective in the near future.

The comments reinforced expectations that Japanese policymakers are considering further steps toward tighter monetary policy as they assess inflation and economic conditions.

Elsewhere in the Asia-Pacific region, the Australian dollar fell to a two-month low of $0.6940. The currency came under pressure even after domestic inflation data was slightly weaker than expected, as investors reassessed the likelihood and timing of another interest rate increase by the Reserve Bank of Australia.

The New Zealand dollar also remained close to its weakest level since November 2025, trading around $0.5636.

Currency markets are likely to remain sensitive to developments in inflation, government bond yields and energy prices as investors assess the direction of monetary policy in the United States and other major economies. The continuing conflict in the Middle East adds another layer of uncertainty, particularly because prolonged disruptions to energy supplies could complicate efforts by central banks to bring inflation back under control.