The dollar saw its best performance in two weeks, with the Bloomberg Dollar Spot Index rising as much as 0.4%, the largest intraday increase since August 28. This surge was primarily driven by a US producer price report that suggested increasing inflationary pressures and a rise in oil prices. Both factors contributed to heightened expectations that the Federal Reserve will raise interest rates this year.
Simultaneously, yields on US government bonds climbed to new multi-year highs as the advance in oil prices intensified bets on a rate hike. Treasury yields across all maturities increased by six to eight basis points. The 30-year bond's yield reached levels last observed in 2007, while the two-year note's yield surpassed 4.5% for the first time since 2024. Traders significantly increased their expectations for a Fed rate hike next week to approximately 70%, and a move by October is now fully priced in, rather than December.
The Producer Price Index (PPI) for final demand in August rose 0.4% month-over-month and 5.4% from a year earlier, slightly exceeding economists' expectations of 5.3% and accelerating from 4.7% in July. Energy prices were a significant contributor, jumping 4.2% during the month due to the Middle East conflict pushing oil prices sharply higher. This acceleration in producer prices is noteworthy as they can eventually translate into higher consumer inflation if companies pass on increased input costs to customers.
The strengthening of the dollar is supported by higher interest rates, which enhance the attractiveness of dollar-denominated assets. The market is now pricing in approximately a 70% probability of a 25-basis-point rate increase following the latest PPI report. This shift in sentiment, combined with a strong August US jobs report, reduces the urgency for the Fed to use lower borrowing costs to support the economy. Attention now turns to the US Consumer Price Index report on Friday, September 11, which could further influence the Fed's decision, with a hotter-than-expected reading potentially strengthening the case for a September rate hike and further supporting the dollar and Treasury yields.
