Dollar keeps climbing as oil, US yields stay high; jobs data looms

By Alun John and Jiaxing Li

LONDON/HONG KONG, Sept 29 (Reuters) - ‌The dollar rose on ​Tuesday, testing several-month ​highs against major peers, underpinned by volatile oil prices and a recent rapid climb in Treasury yields, while the Aussie struggled as traders saw a dovish message hidden inside a rate hike.

The euro dropped by as much as 0.32% to $1.13325, a three-month low, ‌and a fall past its late June levels would take it to the lowest in well over a year, as ⁠the currency struggles in the face of a global energy shock and growing political risk in Europe.

But it is by no means unique. The pound fell 0.25% to $1.3221, again in sight ‌of three-month lows hit last week, while the ‌Swiss franc was also weaker at 0.8335 per dollar, its softest in four months.

Beyond domestic European reasons for weakness that are sending its currencies lower on the dollar, the greenback also is strengthening.

Elevated oil prices and a storming economy have markets pricing in meaningful rate hikes by the Federal ​Reserve.

That in turn has sent Treasury yields higher across the curve, with the two-year yield - more important than longer dated peers for currencies - around its highest in two years and closing in on the symbolic 5% level. [US/]

That yield was a whisker lower on Tuesday, and oil prices steadied, with ⁠Brent crude futures at $104.5 a barrel, though still at painful levels for many energy intensive industries. [O/R]

But investors and analysts are increasingly shifting their view on the dollar.

In a note, James Lord, global head of ​FX at Morgan Stanley, said the bank "now forecast USD strength through year-end and into 2027", from a prior expectation that the dollar would continue its descent into the year's second half.

It now forecasts the euro to fall to $1.10 ​by mid-2027, as widening rate differentials between the US and the rest of the ‌world, robust US growth and European risk premiums are expected to support the dollar.

"Elevated energy prices, robust US data, and a hawkish (Federal Reserve) reaction function have generated not just a rate hike but likely further hikes to come," the note ⁠said.

In contrast with the U.S., European Central Bank President Christine Lagarde pushed back on Monday against some of the most aggressive market bets on ECB rate hikes.

CENTRAL BANKS' TIGHTENING EYED

The dollar's next test is this week's key US data, including the PCE price index on Wednesday and nonfarm payrolls on Friday, to see if it supports the case for ⁠further Federal Reserve rate hikes.

Markets now see a more than 70% chance of a rate hike by the Federal Reserve at the end of October.

But the Australian dollar's performance ​on Tuesday offers a warning of what can happen to currencies when expectations for rate hikes get ahead of themselves.

Australia's central bank raised its cash rate to a 15-year high of 4.60% on Tuesday in a unanimous decision, saying inflation was too high and it was prepared to hike further if needed.

But the Aussie plumbed its lowest in ‌nearly two months, to stand down 0.44% at $0.6988, after a brief spike to a high of $0.7029 on the decision.

Australian yields fell, bringing the currency with them, after the Reserve Bank of Australia's governor told a press conference the ‌board had considered a hold as well as a hike of 25 basis points.

"While this might sound unremarkable, markets may have been worried the discussion was between 25bp and ⁠50bp," said analysts at RBC Capital Markets.

The Japanese yen was ‌steady at 157.3 per dollar, having given back ​Monday's gains after top currency diplomat Atsushi Mimura said markets should heed the "very clear" warning that Tokyo and Washington delivered last week on the yen.

(Reporting by Jiaxing Li in Hong Kong and Alun John in London; Editing by Kevin Buckland, Clarence Fernandez ‌and Gareth Jones)

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