Dollar Driven by Debt Sell-Off, Not Near-Term Rate Hikes

The dollar is continuing its upward trend, driven primarily by the global sell-off in government debt and safe-haven flows into the greenback. This phenomenon has eclipsed concerns about near-term Federal Reserve rate hikes, with markets now pricing in less than a one-in-three chance of an October increase.

Wednesday's unexpectedly soft US PCE figures - the Fed's preferred measure of inflation - had little impact on the dollar, which 'ricocheted off' the data like a bullet bouncing off steel. This resilience is significant because it suggests that currency markets are being driven more by bond market developments than by the near-term Fed rates path.

The upcoming nonfarm payrolls report will put this hypothesis to the test, with consensus pointing to a job creation number around 90k. While this would be well above breakeven employment growth, a weak report could potentially kill speculation about an October rate hike altogether.