Dollar Set for Second Weekly Gain

The dollar index held above 101 on Friday after rising for four straight sessions, trading at its strongest levels in nearly two months and on track to advance for the second consecutive week. The greenback strengthened as elevated oil prices and robust US economic data stoked inflation concerns, reinforcing expectations that the Fed may tighten policy further. Markets are currently pricing in roughly a 67% probability of a Fed rate hike in October, following last week's increase. New York Fed's John Williams said the central bank still has a lot of work to do to bring inflation under control, while Philadelphia Fed's Anna Paulson said some modest additional policy tightening could be warranted. On the data front, US weekly initial jobless claims unexpectedly fell by 1,000 to a two-month low of 197,000, pointing to continued labor-market resilience. Investors now await consumer sentiment and durable goods data on Friday for further clues about the economy.

The dollar index extended its gains for a fourth consecutive session, rising to 101.2 on Thursday, its longest winning streak since May and keeping it near July highs. The dollar has been supported by expectations of further Fed tightening. Oil prices also moved higher amid elevated tensions between the US and Iran, while talks on the sidelines of the UN General Assembly have made little progress toward ending the conflict. Higher energy prices are likely to add further pressure on inflation, particularly as US diesel prices hit a new record high. Against this backdrop, traders have increased their bets on further Fed tightening this year. Markets are now pricing in nearly a 64% chance of another 25 bps rate hike in October. Recent comments from several Fed officials have also been perceived as hawkish. Meanwhile, the dollar strengthened against the Swiss franc after the Swiss National Bank left interest rates unchanged at 0%. The Japanese yen also weakened to three-week lows.

The dollar index held above 101 on Thursday, hovering at its highest level in almost two months as stronger-than-expected economic data heightened inflation concerns and reinforced expectations for further policy tightening. S&P Global data showed US private-sector activity expanded at its fastest pace in more than five years in September, with both the services and manufacturing sectors improving while facing stronger inflationary pressures. Several Federal Reserve officials have also reaffirmed support for last week’s rate increase while warning of persistent inflation risks. Markets are now pricing in around a 70% chance of a Fed rate hike in October, up from 55% a day earlier. Meanwhile, uncertainty surrounding US-Iran negotiations continued to keep oil prices elevated, adding further pressure to inflation expectations.