Dollar jumps to near two-month high on Fed outlook, inflation concern

By Chuck Mikolajczak

NEW YORK, Sept 23 (Reuters) - The US dollar ‌rallied to its highest level ​in nearly two ​months on Wednesday as investors' expectations of a near-term Federal Reserve rate hike grew, while oil prices jumped after Iran cast doubt on progress in peace talks.

Since the central bank's rate hike of 25 basis points last week to the 3.75%-4.00% range, several Federal Reserve officials have ‌flagged the possibility of more rate increases if inflation does not cool.

On Wednesday, Federal Reserve Governor Michael Barr said the US ⁠central bank took an important step last week to "recalibrate" short-term borrowing costs to bring down inflation, and will likely need to deliver further interest rate hikes.

"It's a rate story right now," said Elias Haddad, ‌global head of markets strategy at Brown Brothers ‌Harriman in London.

"What's driving the dollar higher is a follow through from the hawkish Fed hike that we got last week and that's just given the dollar some renewed momentum. This week there hasn't been much data, or policy relevant data, but what was interesting is the comments from Fed officials, they're basically ​all toeing the same line that more tightening is in the pipeline."

The dollar extended gains after S&P Global said its flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 58.4 this month, its highest since July 2021, after a 56.0 reading in August, powered by a surge ⁠in new orders, though strong demand strained supply chains and pushed prices higher.

The dollar index, which measures the greenback against a basket of currencies, rose 0.51% to 101.06 after hitting 101.23, its highest since July 29.

Expectations the ​Fed will hike rates by at least 25 basis points at its October meeting climbed after the data and were last at about 70%, according to LSEG data, up from roughly 53% before the release.

MIDDLE EAST TENSIONS LIFT OIL

Further fueling gains ​in the greenback was a rise in oil prices, after Mohsen Rezaei, secretary of Iran's Supreme ‌National Security Council, said in an interview with state TV that as long as Iran's conditions are not met, the Strait of Hormuz would not be reopened and there would be no negotiations.

In addition, a senior Iranian official told Reuters that Iran and ⁠the United States remain far apart on how to end their war but diplomacy must continue, after Iran's president told the UN General Assembly that Tehran would never surrender to US pressure.

Hopes that diplomacy at the UN General Assembly could lead to a resolution to the seven-month-long Iran war had helped push oil prices lower since reaching a four-month high in mid-September, but ⁠have since reversed course this week.

Federal Reserve Bank of Chicago President Austan Goolsbee said the central bank needs to "be careful" and may need to treat the current energy shock as a source ​of persistent inflation rather than expect it to dissipate on its own.

EURO WEAKENS, YEN UNDER PRESSURE

The euro was down 0.51% at $1.1389 and on pace for its third straight daily decline and biggest drop in a week. Earlier S&P Global Flash Euro Zone Composite PMI Output Index data showed the region's economy is showing unexpected signs of health even as conflicts in the ‌Middle East and Ukraine drive up energy costs for firms and households.

Investors are also waiting for a meeting between US President Donald Trump and Chinese President Xi Jinping, with the superpowers at odds over trade, technology and the Iran war.

The dollar ‌strengthened 0.17% to 6.71 versus the offshore Chinese yuan.

The Japanese yen weakened 0.52% against the greenback to 158.19 per dollar as traders gird for any signs of intervention after the Bank of ⁠Japan's rate hike to a 31-year high last week fell short ‌of reassuring investors that more increases may be on ​the way.

Japanese markets are closed for a holiday and this period of lower liquidity makes it more likely that authorities intervene, according to analysts.

(Reporting by Chuck Mikolajczak; additional reporting by Amanda Cooper in London and Ankur Banerjee in Singapore; Editing by Alexandra Hudson, Xevi Fontdegloria ‌and Sanjeev Miglani)

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