Written by Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this article can be viewed here.

The dollar traded higher against all the other major currencies on Tuesday and continued trading on the front foot today as well, with the dollar index hitting a fresh 10-month high.

It seems that the Fed’s “higher for longer” mentality is still adding fuel to the currency’s engines, as well as lifting Treasury yields, with the 10-year benchmark rate jumping to a new 16-year high on Tuesday on the back of data pointing to a resilient economy that can withstand more interest rate increases.

Minneapolis Fed President Neel Kashkari said yesterday that a “soft landing” is more likely than not, adding that there is a 40% chance they will need to raise rates meaningfully to fight inflation, with the case of hiking once more and then staying on hold receiving a 60% probability.

Still, the market assigns a less than 50% probability for another quarter-point hike before this tightening crusade ends, while it sees interest rates ending 2024 at lower levels than last week’s dot plot suggested. This means that there is still room for upside adjustment, and thereby further advances in the US dollar, should upcoming US data continue to point to strong economic performance.

The next focal point for dollar traders may be the core PCE index for August on Friday, which is expected to have slightly slowed to 3.9% YoY from 4.2%. Although this could result in a pullback in the greenback, it is unlikely to change the broader outlook, as the index would still be well above the Fed’s objective of 2%, and combined with more data pointing to economic resilience is unlikely to prompt Fed policymakers to alter their “higher for longer” mentality.

Dollar/yen is extending its uptrend as Treasury yields continue to rally at a time when the BoJ is keeping a lid on its own government bond yields. With that gap widening, the pair emerged above 148.85 and could continue higher for a while longer as the BoJ appears in no rush to adjust its policy soon.

However, the higher the pair goes, the higher the probability for intervention grows. Another round of verbal warnings hit the wires on Tuesday, with Finance Minister Suzuki saying that they are “watching currency moves with a high sense of urgency”. According to market chatter, the round number of 150.00 may be the line in the sand that could trigger action, but with warnings not so frequent as last year, the intervention level may have moved a bit higher.

In any case, with the BoJ not willing to alter its policy any time soon and Fed officials pledging to keep rates higher for longer, the gap between US and Japanese yields may continue to widen, which means that any declines in dollar/yen due to intervention are unlikely to be permanent.

All three of Wall Street’s main indices ended Tuesday in the red, losing more than 1% each as the Fed’s hawkish outlook on interest rates continued to exert pressure, especially on high-growth firms that are usually valued by discounting projected cash flows for the quarters and years ahead.

That said, the outlook of interest rates is not the only driver of equities. Fears about the performance of the Chinese economy are also weighing, while the prospect of a new government shutdown in the US may be a new source of uncertainty.

The US Senate voted to begin debating on a measure that would fund the government and keep it running until November 17. However, the Republican-controlled House seems unwilling to support the Senate’s proposal as they are planning to push along with their own partisan approach. If no common ground is found this week, the government shuts down on Sunday, for the fourth time in a decade.