By Stefano Rebaudo
Sept 24 (Reuters) - The dollar eased slightly from a roughly two-month high on Thursday as investors paused after a sharp rally fuelled by expectations of additional Federal Reserve rate hikes following strong economic data and last week's hawkish shift.
Two-year Treasury yields, highly sensitive to policy rate expectations, hit their highest since May 2024 after posting their biggest daily rise since April 2025 on Wednesday as strong business activity data reignited inflation concerns.
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The Fed raised rates and signalled further tightening last week, with Chair Kevin Warsh stressing the central bank's independence despite repeated calls from President Donald Trump for lower borrowing costs.
The hawkish stance has eased concerns that a Warsh-led Fed would take a softer line on inflation, a prospect that could have weighed on the dollar and other US assets.
"Very strong US PMIs, higher oil prices and soft risk sentiment have all contributed to the bullish narrative, although the move is starting to look stretched relative to fundamentals," Francesco Pesole, forex strategist at ING, said.
"We are cautious in calling for a bottom in the dollar just yet because any upside surprise in upcoming US data releases can easily prompt markets to fully price in an October Fed hike and prop up short-term rates even more," he added.
Traders now see a nearly 70% chance of another increase when the US central bank next meets in October, according to CME Group's FedWatch Tool, up from 50% a week ago.
Investors closely watched energy prices and geopolitics with Brent crude slightly up after jumping overnight as Iran and the United States remain far apart on how to end the war.
The greenback tends to strengthen when oil prices rise as investors often sell currencies of energy-importing economies such as the euro and yen, whose trade balances are more vulnerable to higher crude costs.
The US dollar index, which measures its value against a basket of six major currencies, was down 0.05% at 101.05, after rising 0.56% to 101.23 on Wednesday, its firmest since July 29.
The dollar's strength left the euro near a two-month low of $1.1384, while sterling languished near a three-month low at $1.3240.
YEN SET TO BREAK A FOUR DAY FALLING STREAK
Japanese Finance Minister Satsuki Katayama said the principles underpinning the coordinated Japan-US currency intervention in July remain intact, signalling Tokyo is prepared to act jointly again if needed.
The remarks helped snap the yen's four-day slide, though sentiment remained fragile after last week's Bank of Japan rate hike to a 31-year high failed to convince investors that a faster tightening cycle is in store.
The dollar was down 0.10% versus the yen at 158.18 after reaching 158.49, its highest level since September 3.
"The yen is another currency that may find the going tough in the coming weeks although the ever-present threat of forex intervention should help temper the rise in the dollar/yen," Daragh Maher, senior forex strategist at HSBC, said.
"The yen surge in early September has already reversed and with positioning less stretched, we are unlikely to see a fresh short squeeze," he added.
The Australian dollar fetched $0.7036, down 0.06% ahead of the latest jobs data, and the kiwi traded flat at $0.5675.
Elsewhere, the offshore yuan traded flat at 6.7119 per dollar, as markets watched Chinese President Xi Jinping's first US visit in three years, a high-stakes meeting set to test ties as tensions linger over trade, technology, Taiwan and Tehran.
(Reporting by Stefano Rebaudo; Additional reporting by Jiaxing Li in Hong Kong; Editing by Shri Navaratnam and Jacqueline Wong)
