Dollar strengthens on rising yields, higher Fed hike bets

The US dollar gained ground against major currencies as Treasury yields moved higher. At the core of the fundamental backdrop is the Federal Reserve, with traders increasingly weighing the possibility that last week's rate increase may not be the final move.

The flash S&P Global US composite PMI for September came in at 58.4, climbing from 56.0 in August and marking the highest level since July 2021. The services sector drove the gains, manufacturing output picked up, and hiring accelerated. That indicates an economy still expanding. But backlogs and supply delays also rose, and businesses noted higher input costs. Robust growth provides the Fed with room to raise rates again, while ongoing price pressures offer a reason to consider doing so.

Fed officials have been echoing that view. Richmond Fed President Tom Barkin said on Tuesday that risks from inflation outweigh those from employment and that the economy may be firming. Boston Fed President Susan Collins backed last week's rate increase and argued that tighter policy is necessary to return inflation to 2%. Chicago Fed President Austan Goolsbee cautioned that strong demand could be intensifying price pressures from energy and other supply disruptions.

Fed Governor Michael Barr, a voting member of the FOMC, reinforced that stance on Wednesday. He said the Fed had been "out of position" before last week's hike and that additional policy adjustments will probably be needed in his base case. Growth is strong and the labor market is solid, he said, but inflation is not clearly returning to 2% fast enough.

The market now prices in roughly a 64% probability of a rate increase at the October meeting, up from about 50% a day earlier. That repricing helps account for the rise in Treasury yields and the dollar's strength. The Fed's next meeting is set for October 27–28, before the November elections. President Trump has called for lower rates and criticised last week's move.

Why do higher yields support the dollar?

For currency traders, yields form part of the return from holding one currency over another. When US yields rise relative to those elsewhere, dollar-denominated assets can become more appealing. Investors seeking that return may need to purchase dollars, lending support to the currency.

That relationship is helpful but not a standalone trading signal. Yields can climb while a currency pair struggles to break a technical level. At other times, the dollar can move ahead of yields. The news explains the pressure; the price action shows where buyers and sellers are actually taking control.

That is what I focus on in the video above. I take a technical look at EURUSD, USDJPY, GBPUSD, USDCHF and USDCAD, identifying the levels that define the near-term bias, where traders can measure their risk, and the next targets if the dollar's move continues.

Remember that a stronger dollar generally pushes EURUSD and GBPUSD lower, while it pushes USDJPY, USDCHF and USDCAD higher. The direction is easy to mix up when the dollar appears on different sides of a currency pair. The video walks through each chart so you can see what the dollar's strength means for that pair—and what price would need to do to challenge the current move.

Some quick notes for each:

EURUSD: The EURUSD fell below the next targets at 1.1419 and 1.14072. On the downside traders would not look toward 1.1377 and 1.13634 followed by the July low price at 1.13525. The low price from June bottomed at 1.13243. Close risk could be looked at at 1.1419. Stay below and the sellers are in firm control.

USDJPY: The USDJPY moved above a key swing area target at 157.90 up to 158.04. The 200 day moving average at 158.433 is next key target. Get above that longer-term moving average and the bias shifts even more in favor of the buyers. Recall however that the Bank of Japan checked rates on Friday after the price moved up to the 158.045 area. So caution must be maintained.

GBPUSD: The GBPUSD moved below the July low price at 1.32729. That level is now a close risk level for traders in addition to 1.3303, and a more important swing area between 1.3321 and 1.3340. On the downside, there is a lot of support until around the 1.3218 level followed by a swing area down to 1.3171 and 1.3181.

USDCHF: The price of the USDCHF moved above its 100 hour moving average at 0.82237, and based against that level before moving to new session highs near 0.8750. The 0.8237 is now close risk. If the price stays above that moving average, the buyers are in firm control with the high price for the year at 0.8262 as the next target. That level is the highest level going back to the end of May 2025. Another key support level is at 0.82116 which is the 38.2% retracement of the trading range since the 2025 January high price.