Dollar Hits 2-Month High on Hot PMI and Rate Hike Bets

The U.S. dollar climbed to a two-month high at 101.1, driven by strong manufacturing purchasing managers' index data, surging Treasury yields, and escalating market bets on further monetary tightening.

"Given the relative strength of US growth and increasingly aggressive Fed rate-hike pricing, the US dollar continues to stand firm in its attraction to own," said Chris Weston, head of research at Pepperstone.

Treasury Yields and Macroeconomic Pressures

Fixed-income markets experienced heightened volatility as five-year U.S. Treasury yields crossed 5% for the first time since 2007 following a poorly received debt auction. This climb in yields reflects sustained supply pressures and strong economic data challenging earlier expectations of monetary easing.

According to FRED economic data, the effective federal funds rate stood at 3.63% as of August 1, 2026. Higher borrowing costs across longer-dated maturities continue to ripple through broader credit markets as investors recalibrate portfolios around a higher-for-longer interest rate trajectory.

Shift in FedWatch Probabilities

Derivatives markets have adjusted rapidly to the persistent strength in economic indicators. Traders see a nearly 70% chance of another rate increase when the U.S. central bank next meets in October, up from a 50% probability a week prior, according to CME Group's FedWatch Tool.

This repricing highlights a sharp divergence between earlier market consensus and current macroeconomic realities. Hot manufacturing PMI readings point to sustained domestic demand and persistent price pressures, complicating the Federal Reserve's path forward as policymakers weigh the risk of resurgent inflation against labor market stability.