Dollar Strengthens on US Growth Prospects and Rising Rates

The US dollar has strengthened over the past two weeks, driven by improved growth prospects and rising interest rates. The composite PMI for September reached its highest level since 2021, with strong demand and rising input costs pushing up the two-year Treasury yield to near 4.9%. The DXY index has closely followed the front-end of the US yield curve.

The 10-year Treasury yield above 5% adds another dimension to the dollar's strength, reflecting higher expected policy rates, rising real yields, and a larger fiscal premium. However, a disorderly sell-off in rates could trigger deleveraging and make the currency's response less predictable.

Energy and European risks are also supporting the dollar's relative advantage. Brent crude prices above $100 have kept inflation uncertainty elevated, while a possible US diesel export ban could ease domestic price pressure but tighten fuel supply abroad.

This week's key releases include the PCE, ISM surveys, and payrolls report, which will determine whether the rate move has further room to run. A firm inflation and activity reading would keep additional Fed tightening in play and potentially push DXY through 101 towards 1.01.5, particularly if the two-year yield reaches 5%. Conversely, a weak payroll gain could bring labor-market risks back into the policy debate and expose the 100 area.