The U.S. dollar held near its highest level in two months despite falling oil prices and a relative easing in the selloff across U.S. Treasury markets. Caution remained dominant in currency markets, particularly as expectations for further U.S. interest rate hikes declined following less hawkish comments from a Federal Reserve official. The U.S. Dollar Index, which measures the performance of the greenback against a basket of six major currencies, rose to 101.37 points, marking its highest level since July 28. Meanwhile, both the Australian dollar and the British pound came under pressure, with the former falling to a two month low while sterling traded near its lowest level in around three months.
Oil prices fell to their lowest level in nearly a week as signs emerged of improving crude flows from the Middle East, partially easing concerns surrounding the diplomatic deadlock between the United States and Iran. According to preliminary Kpler data, crude exports from major producers in the region rose to 12.8 million barrels per day in September, the highest level since February. Improving supply conditions helped markets absorb part of the geopolitical risk premium despite continued tensions around the Strait of Hormuz and U.S. President Donald Trump rejecting an Iranian proposal to reopen the waterway. Reports also indicated that Qatari mediation efforts were continuing through separate talks with both sides, although expectations of reaching an agreement before the U.S. midterm elections remained limited.
In the bond market, U.S. Treasury yields experienced volatile moves after longer dated yields climbed to levels not seen in decades before selling pressure eased following remarks from New York Fed President John Williams. Williams said the central bank did not need to rush its next policy move. Geopolitical tensions and elevated energy costs remain among the main factors keeping inflation expectations high and supporting elevated bond yields, while uncertainty surrounding the financial cost of the conflict and the U.S. fiscal deficit continues to weigh on fixed income markets.
In Australia, the Australian dollar fell to $0.6986, its lowest level since July 29, despite the Reserve Bank of Australia raising interest rates by 25 basis points to the highest level in 15 years. The decision was unanimous, with Governor Michele Bullock warning that persistent underlying inflation, higher energy costs, and weak productivity growth continued to threaten price stability. Bullock also confirmed that the central bank was prepared to raise rates again if necessary. However, because markets had already priced in the decision, attention shifted toward the narrowing Australian yield advantage compared with rising U.S. borrowing costs, keeping the currency under pressure.
The British pound fell to $1.3231, trading near its lowest level since June 26 after a speech by newly appointed UK Prime Minister Andy Burnham. Burnham outlined a different approach to managing the British economy, including a greater state role in certain utilities and changes to the pension triple lock system. These proposals attracted market attention, particularly regarding their potential impact on the UK public finances, while investors remained focused on whether the government could implement such measures without adding further pressure to the bond market.
Across global debt markets, sovereign bond yields remained close to multi year highs, supported by ongoing geopolitical risks, elevated energy prices, and tighter policy expectations across several major central banks. The U.S. 10 year Treasury yield held near 5.2%, while the 30 year yield traded around 5.5% and the two year yield remained close to 4.9%. In Australia, the 10 year government bond yield fell to 5.3% after reaching its highest level since 2011 in the previous session, following the Reserve Bank of Australia decision to raise the cash rate to 4.60%.
At the same time, several Federal Reserve officials continued to support keeping monetary policy restrictive for longer as concerns over inflation persisted. Federal Reserve Governor Lisa Cook indicated that inflation could remain elevated in the coming months due to strong demand linked to major artificial intelligence investment and higher global oil prices. Markets had previously increased expectations for another interest rate hike in October, but the outlook shifted quickly following weaker labor market data and more cautious remarks from central bank officials.
According to the CME FedWatch Tool, the probability of the Federal Reserve raising rates to 4.25% in October fell to 49.4% from 74.6% a day earlier, while the probability of keeping rates unchanged rose to 50.6% from 25.4%. This shift followed comments from John Williams, who said there was no need to rush further rate increases and suggested that only one additional hike this year might be enough to help control inflation. Weaker than expected JOLTS job openings data and softer consumer confidence also increased doubts about how much room the Federal Reserve has to continue tightening policy at the same pace.
Markets are now focused on the August Personal Consumption Expenditures Price Index, the Federal Reserve preferred inflation gauge, as well as the September nonfarm payrolls report due on Friday. The strength or weakness of these releases will play a major role in shaping interest rate expectations for the final quarter of the year. Persistently high inflation could support the case for another rate increase, while signs of softer labor market conditions and weaker spending could strengthen expectations that the Federal Reserve will take a more cautious approach.
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