The U.S. dollar strengthened against major currencies on Thursday, September 07, 2023, as investors increased bets on further Federal Reserve policy tightening. The Bloomberg dollar index rose to a new six-month high, while Treasury yields drifted higher across the curve, extending Wednesday's increases that pushed two-year yields above 5%. This followed Wednesday's stronger-than-anticipated service-sector activity data, which led to increased market-implied odds of a quarter-point Fed rate hike in November.
On Wednesday, short-dated Treasury yields, which are more sensitive to changes in the Fed’s rate, were several basis points higher. The two-year yield was around 5.01% after rising nearly 6 basis points to 5.02%.
The rise in Treasury yields and the strengthening dollar came after the August Institute for Supply Management's U.S. services index reached 54.4, its highest monthly reading since February and one that surpassed all estimates in a Bloomberg survey of economists. A reading above 50 denotes growth.
"The ISM Services Sector report underscores the resilience of the largest portion of the economy," said Quincy Krosby, chief global strategist at LPL Financial (NASDAQ:LPLA) to Bloomberg. He noted that the data showed higher prices, which he said was "certainly not good news for a data-dependent Fed."
In Asian markets on Thursday, shares opened with muted moves. Australian bond yields also edged higher following the increase in U.S. Treasury yields. Meanwhile, Japan and China took measures to defend their currencies. Japan issued a warning about yen depreciation on Wednesday, while China’s central bank provided unprecedented guidance to stabilize the yuan.
Equities in Australia and South Korea fell, reflecting a decline in U.S. stocks on Wednesday when the S&P 500 fell 0.7% and the tech-heavy Nasdaq 100 declined 0.9%. Japanese stocks opened slightly higher due to the weaker yen. Hong Kong and U.S. futures were little changed.
In commodity markets, West Texas Intermediate oil clung to a gain from Wednesday, extending a run of nine daily advances - its longest winning run in more than four years. The price has risen around a fifth in the past three months to edge closer toward $90 per barrel. Gold steadied after dropping on Wednesday.
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