Above: File image of Michelle W. Bowman. Image: Federal Reserve.

The Dollar advanced at the start of a new month and quarter thanks to some stronger-than-expected U.S. data, a renewed rally in U.S. bonds and comments from a Federal Reserve Governor that reminded markets another rate hike is on the table before the year ends.

A data-busy week in the U.S. got underway with the ISM Manufacturing PMI coming in at 49.0 in September, a figure that exceeded the 47.7 level the market was anticipating and suggested some improvement in this sector of the economy.

"There are areas of very positive news with the details showing production actually broke above 50 to stand at 52.5, which is the best reading since July 2022 while employment also posted positive growth with an index level of 51.2 – the highest print since May," says James Knightley, Chief International Economist at ING Bank.

The data puts the market on alert for further rate hikes at the Federal Reserve, an expectation reflected in rising U.S. bond yields.

"The buying of the U.S. dollar has resumed today, following a better-than-expected ISM manufacturing figure. Good US data means the rationale to back the greenback becomes stronger than ever," says Chris Beauchamp, an analyst at IG.

Long-term bond yields started the month by going higher and retracing losses made in the previous week, which is in turn supportive of the Dollar.

Last week saw long-term bond yields surge, taking the Dollar to fresh highs before the move was pared back ahead of month-end.

The resumption of this trade could boost the USD across the board: at the time of writing the GBP to USD exchange rate is two-thirds of a per cent lower at 1.2127 and the EUR to USD pair is down by 0.70% at 1.05.

Expectations for higher U.S. interest rates were further bolstered by Federal Reserve Governor Michelle Bowman who on Monday said she remains willing to support another increase in the central bank's policy interest rate at a future meeting if incoming data shows progress on inflation is stalling or proceeding too slowly.

"I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2% in a timely way," Bowman said.

Rising oil prices are meanwhile expected to keep inflation rates uncomfortably high she said, noting that the latest measure published on Friday of the Fed's preferred inflation gauge – the personal consumption expenditures price index (PCE) for August – showed that overall inflation rose, in part due to higher oil prices.

"I see a continued risk that high energy prices could reverse some of the progress we have seen on inflation in recent months," said Bowman.

Last month the Fed left its benchmark rate unchanged in a range of 5.25% to 5.5% but projections from policymakers released at the time indicated a majority of them saw one more quarter-percentage point increase by year end.