Dollar set for weekly gains as yields surge

The dollar was set for its first back-to-back weekly gains in more than three months on Friday, as surging Treasury yields and mounting bets on further Federal Reserve rate hikes kept the greenback near multi-month peaks.

Dollar strength pushed the euro to a two-month low of US$1.1370 and put it on track for a third weekly decline, its worst losing streak since the end of 2025. Sterling languished near a three-month low of US$1.3220 and was on track for its worst weekly performance in four months.

Markets have aggressively repriced the interest rate trajectory after the Fed tightened policy last week, while robust economic data and fresh energy supply concerns have further strengthened that conviction. A bond selloff, which sent long-dated US Treasury yields to their highest in more than 20 years, also gave the greenback a leg up.

The dollar index, which measures the US currency against a basket of peers, has climbed more than 1% this week to a two-month high, marking its first back-to-back weekly gains since June. However, the rally was losing some momentum, last edging a touch lower at 101.2.

“Whilst the dollar should get a bid from higher yields, there are still ongoing lingering concerns around the US fiscal position, the unpredictability of US policy making,” said Khoon Goh, head of Asia research at ANZ.

“I think that’s why the dollar has really struggled to continue to rally, even though yields continue to increase.”

Oil prices jumped more than 3% on Thursday to a one-week high after a Houthi missile attack on Saudi Arabia revived fears of supply disruptions, adding to inflation risks.

Yen under watch as Fed bets build

A chorus of hawkish Fed speakers strengthened expectations for further tightening, with Philadelphia Fed President Anna Paulson saying “some modest further tightening may be warranted”, while New York Fed President John Williams said “another rate hike may be appropriate by the end of the year.”

At 158.8 per dollar, the Japanese yen continued to hover near a three-week low after markets judged the Bank of Japan’s rate hike to a 31-year high and policy guidance last week as not hawkish enough.

However, moves were tempered as traders remained wary of official intervention risk after Tokyo issued fresh verbal warning, while a former BOJ board member said the central bank now could raise rates every quarter.

“Faster rate hikes have reduced the inflationary impact of expansionary fiscal policy, taking pressure off the currency,” Goldman Sachs said in a report. The bank revised down its 12-month USD/JPY forecast to 150 from 165.

The Australian dollar inched higher to US$0.7015 while the kiwi traded flat at US$0.5663. The Reserve Bank of Australia is expected to raise interest rates by 25 basis points to a near 15-year high of 4.60% next week, in what would be the final rate increase in the tightening cycle.

Elsewhere, the offshore yuan traded flat at 6.715 per dollar, as a Trump-Xi summit in Washington showed no signs of breakthroughs at a closed-door meeting on thorny issues such as AI, trade, Taiwan and the war with Iran.

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