The dollar held near 19-month highs on Friday and was set for its biggest weekly rise in two months, as bets on a larger US rate hike pushed Treasury yields higher and the yen hovered below the 160 mark. Tokyo has warned it would respond to excessive currency moves. Treasury yields rose after President Donald Trump said the US did not need a deal with Iran, stoking worries about Middle Eastern oil supply, lifting crude prices and, with them, inflation expectations.
Hawkish comments from Federal Reserve officials and this week's stronger-than-expected US inflation data have left traders weighing a larger-than-usual rate hike next month. Fed officials warned that US inflation remains stubbornly elevated, with some signalling openness to a 50-basis-point increase if price pressures fail to ease. Traders are pricing in a 12.1% chance of such a hike next month, up from 0% last week, according to the CME FedWatch tool. Two-year Treasury yields have risen 33 basis points this week to around 4.85%, on course for their biggest weekly jump since 2024.S1
The dollar index was at 103.17, near its highest since April 2025, and is set to gain 0.9% for the week, the most since September. The euro edged up 0.1% to $1.1065 after hitting its lowest level against the dollar since April 2025, and is down 0.7% for the week. Nick Rees, head of macro research at Monex, said the biggest risk to dollar strength is a Middle East peace deal, which would diminish the support it draws from high energy prices and its safe-haven status. Absent that, he said, the dollar is likely to remain around current levels or strengthen slightly.S1
The yen was steady at 159.90 per dollar, around its weakest since early September, fuelling concerns about possible intervention. Japanese Finance Minister Satsuki Katayama said on Friday the government would respond appropriately to currency volatility. Japan previously spent 15.4 trillion yen ($96.5 billion) to bolster the currency after it sank to a four-decade low of 163.99 per dollar in late July. Rees said markets will be cautious around the 160 level and expects the intervention trigger to be somewhat higher.S1
Elsewhere, the Australian dollar has fallen about 3.4% so far this month, the worst performer among G10 currencies against the greenback, and Australia is the only G10 country where markets are pricing a rate cut next year. The dollar was little changed against the Swiss franc at 0.836, near a one-month high. Among cryptocurrencies, bitcoin fell 3.8% to $68,759, dropping below the key $70,000 level.S1
