Dollar Surges Amid Softer Inflation, Bond Yields Climb

The US dollar has strengthened further, reaching two-month highs despite softer-than-expected inflation figures. The annual Personal Consumption Expenditures (PCE) inflation rate for September came in at 3.4%, below the forecasted 3.7%. The core measure of inflation also fell short, hitting 3.0% instead of the predicted 3.3%. This led to a rise in the US dollar index and a climb in benchmark 10-year Treasury yields from 5.24% to 5.28%, up from September's start at 4.75%.

The decline in inflation expectations weighed on other currencies, with the Australian dollar (AUD) falling 0.5% after its own inflation report came in below forecasts. Meanwhile, the New Zealand dollar (NZD) and euro (EUR) both lost 0.1%, while the British pound (GBP) gained 0.3%. The yen was supported by former Bank of Japan board member Makoto Sakurai's expectation that the central bank will raise its policy rate from 1.25% to 2.0% by mid-2027, despite a possible October rate hike.

The stronger US dollar and higher bond yields are dominating market sentiment, with softer inflation failing to improve investor confidence. China's manufacturing PMI rose to 50.1 in September, returning to expansion territory as production increased. However, the yuan remains under pressure, with USD/CNH holding near its 21 September low of 6.6912.