Dollar perched at two-month high as hot PMI fuels inflation fears, rate hike bets

HONG KONG, Sept 24 (Reuters) - The dollar clung to a two-month high on Thursday after a strong manufacturing reading reignited inflation fears and rate-hike bets, while a weak ‌Treasury auction sent yields higher across the curve, providing fresh impetus to the US currency.

The ‌broad dollar strength pushed the euro to $1.1378, a two-month low, while sterling languished near a three-month nadir at $1.3231. The dollar index, ​which measures the US currency against a basket of peers, held near a two-month high at 101.1.

A stronger-than-expected purchasing managers' report overnight fanned new price concerns and a poorly received auction of five-year U.S. Treasury notes triggered a fresh round of bond selling, with five-year yields crossing 5% for the first time since 2007.

The backdrop of ‌rising inflationary risks and a strong ⁠economy means the Federal Reserve is likely to deliver more rate hikes, Governor Michael Barr said on Wednesday in comments viewed by markets as "forward guidance", pushing traders ⁠to pile into bets on a second straight policy tightening next month.

"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.

Signs the US economy may be ​overheating are now firmly in focus, and ‌policymakers may need to tighten further if inflation continues to surprise on the upside, he said.

Inflation risks were also amplified by a nearly 4% jump in oil prices on Wednesday after Iran's president vowed never to surrender, with markets also weighing US President Donald Trump's diesel export ban.

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 the 50% probability a week ago.

At 157.9, ​the Japanese yen hovered near its three-week low, with traders ​on alert for possible intervention after markets ​judged the Bank of Japan's rate hike to a 31-year high last week as ‌insufficiently hawkish.

Data released on Thursday showed Japan's manufacturing ​activity rose at a ​slower pace in September from the previous month as output and new orders softened.

The Australian dollar fetched $0.7035, down 0.07% ahead of the latest jobs data, and the kiwi traded flat at $0.5676.

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 Jiaxing Li in Hong KongEditing by Shri Navaratnam)