Dollar pinned at nearly two-month high amid resurgent oil prices, bond rout

The U.S. dollar on Thursday rose for a fourth straight session and remained pinned at a nearly two-month, as a fresh surge in oil prices boosted inflationary concerns and a rout in the bond market showed no signs of letting up. 

At 16:57 ET (20:57 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, was up 0.2% to 101.26, its highest level since July 28. 

Rising oil, yields and a hawkish Fed

Oil prices rose for a second straight session on Thursday, further undoing a five-day losing streak notched on Tuesday. The advance was driven by fading hopes for a diplomatic breakthrough between the U.S. and Iran. 

President Donald Trump and his Iranian counterpart Masoud Pezeshkian have delivered fiery speeches at the United Nations (UN) General Assembly in New York this week.

The U.S. president threatened to "annihilate" Iran and "drive them into hell" or make a deal, and the Tehran official asserted that the country would "never bow" its head or "bend at the knee" while also saying it was open for "dialogue and diplomacy and negotiations."

While indirect talks have taken place between U.S. representatives and the Iranian delegation on the sidelines of the UN, U.S. Secretary of State Marco Rubio on Wednesday said he wouldn’t characterize the discussions as a "major breakthrough" but more a "continuation of conversations that have occurred in the past."

The two countries remain at odds over control of the Strait of Hormuz. Reuters on Thursday said that U.S. and Iranian negotiators in New York had discussed a phased path out of war that would involve Tehran reopening the strait and Washington lifting its economic blockade, citing sources close to the talks. The news helped oil prices pare gains, but the pullback was short-lived.

Meanwhile, a sell-off in the U.S. bond market continued on Thursday, with the U.S. 10-year Treasury yield climbing 8.9 basis points to 5.205%, a level not seen since July 2007. 

A S&P Global report on Wednesday showed U.S. business activity accelerating for a fourth straight month in September, registering the fastest pace of growth since July 2021. A solid rise in both services and manufacturing output buoyed the headline jump.

At the same time, S&P said U.S. price pressures intensified in September, with average input costs across both goods and services jumping and the overall rate of inflation reaching its highest since October 2022. Higher fuel and transport costs were the primary drivers.

With the data showing a combination of a resilient economy and stubborn inflation, expectations for a Fed rate hike in October got a boost. As per the CME FedWatch tool, the odds of a quarter-point hike next month stand at nearly 69% versus about 55% a week ago. Higher rate environments tend to strengthen the dollar.

"Market participants seem to believe that Fed Chair Kevin Warsh is willing to hike interest rates many more times to battle inflationary pressures that are almost entirely being bolstered by energy. The Treasury complex expects four 25-basis-point benchmark increases by the end of next summer, for a total of another full percentage point," José Torres, senior economist at Interactive Brokers, said.