The US dollar index climbed to 99.5 on Friday, extending its rebound from the three-month low of 98.8 reached on August 21. The move tracked a sharp rise in short-term US Treasury yields after Federal Reserve Chairman Kevin Warsh signaled a more hawkish stance on inflation. Warsh noted that underlying inflation had not eased meaningfully in recent months and emphasized that the labor market appears to be at or near full employment.
He also stressed that the Fed continues to rely on the PCE index as its primary inflation gauge, adopting firmer language than earlier indications that a newly formed task force might prompt a shift in the Fed’s preferred measure. In response, interest rate futures swung to price in a higher probability of a Fed rate hike next month.
The dollar also drew support from annual revisions to nonfarm payrolls, which came in well below previously reported figures, reinforcing the picture of solid labor market conditions. At the same time, signs of rising inflation in the Eurozone bolstered expectations of an ECB rate increase, which helped cap the upside for the DXY despite its recent rebound.
