Dollar perched at two-month high as hot PMI fuels inflation fears, rate hike bets

By Jiaxing Li

HONG KONG, Sept 24 (Reuters) - The dollar largely clung to a two-month high on Thursday as markets repriced rate-hike bets after a strong manufacturing reading reignited inflation fears, while a weak Treasury auction sent yields broadly higher, providing fresh impetus to the US currency.

The dollar strength left the euro near a two-month low of $1.1384, while sterling languished near a three-month low at $1.3240. The dollar index, which measures the US currency against a basket of peers, held onto a two-month high at 101.08.

A stronger-than-expected purchasing managers' report fanned new price concerns while a poorly received auction of five-year U.S. Treasury notes triggered a fresh round of bond selling, with five-year yields crossing 5% for the first time since 2007.

The backdrop of rising inflationary risks and a strong economy means the Federal Reserve is likely to deliver more rate hikes, Governor Michael Barr said on Wednesday in comments viewed by markets as "forward guidance", pushing traders to pile into bets on a second straight policy tightening next month.

"Given the relative strength of US growth and increasingly aggressive Fed rate-hike pricing, the US dollar continues to stand firm in its attraction to own," said Chris Weston, head of research at Pepperstone.

Signs the US economy may be overheating are now firmly in focus, and policymakers may need to tighten further if inflation continues to surprise on the upside, he said.

Inflation risks were also amplified by a nearly 4% jump in oil prices on Wednesday after Iran's president vowed never to surrender, with markets also weighing US President Donald Trump's diesel export ban. Brent oil futures were off 0.8% at $102.2 a barrel.

Traders now see a nearly 70% chance of another increase when the US central bank next meets in October, according to CME Group's FedWatch Tool, up from the 50% probability a week ago.

At 157.8 per dollar, the yen rebounded from its three-week low after Japanese Finance Minister Satsuki Katayama said that the principles underpinning the coordinated Japan-US currency intervention in July remain intact, signalling Tokyo is prepared to act jointly again if needed.

The remarks helped snap the yen's four-day slide, though sentiment remained fragile after last week's Bank of Japan rate hike to a 31-year high failed to convince investors that a faster tightening cycle is in store.

The Australian dollar fetched $0.7036, down 0.06% ahead of the latest jobs data, and the kiwi traded flat at $0.5675.

Elsewhere, the offshore yuan traded flat at 6.7119 per dollar, as markets watched Chinese President Xi Jinping's first US visit in three years, a high-stakes meeting set to test ties as tensions linger over trade, technology, Taiwan and Tehran.

(Reporting by Jiaxing Li in Hong KongEditing by Shri Navaratnam)