Dollar Soars on Inflation Fears and Strong US Economy

The US dollar has reached a two-month high due to strong manufacturing data and concerns over inflation, which is causing markets to reprice rate-hike bets. The dollar's strength is pushing the euro to near a two-month low of $1.1384 and sterling to a three-month low at $1.3240. A stronger-than-expected purchasing managers' report has reignited price concerns, while a poorly received auction of five-year U.S. Treasury notes has triggered a fresh round of bond selling.

The backdrop of rising inflationary risks and a strong economy means the Federal Reserve is likely to deliver more rate hikes, according to Governor Michael Barr. This has pushed traders to pile into bets on a second straight policy tightening next month. The US dollar's appeal continues as US growth outpaces other economies, said Chris Weston, head of research at Pepperstone.

The inflation risks were amplified by a nearly 4% jump in oil prices after Iran's president vowed never to surrender. Brent oil futures are currently at $102.2 a barrel. The probability of another rate hike next month has increased to nearly 70%, according to the CME Group's FedWatch Tool.