Dollar holds gains, yen slips as Middle East energy shock deepens

The dollar gained strength on Friday as concerns about potential energy supply disruptions in the Middle East rose, pushing up bond yields and oil prices. The US dollar index remained steady at 99.081, following a 0.3% increase on Thursday, reaching its highest level since September 7. This surge was driven by risk-averse flows, supported by higher energy prices that have increased the likelihood of a Federal Reserve rate hike next week to 70%, according to Tony Sycamore, a market analyst at IG in Sydney.

Energy prices continued their upward trend, with Brent crude futures rising 1.2% to $108.96 a barrel, after the Houthis took control of Yemen's port city of Mocha and advanced toward strategic islands in the Red Sea. The US dollar was 0.1% stronger against the yen at 154.615 yen, while the euro strengthened by a similar margin to 179.49 yen after the European Central Bank raised interest rates for the second time this year.

However, the Japanese yen showed signs of resilience after data revealed wholesale inflation rose 7.6% in August from a year earlier, supporting the argument for a rate hike this month. The Australian dollar remained flat at $0.7160, while the New Zealand dollar increased by 0.1% to $0.5805. Both the euro and the British pound were level against the dollar at $1.1613 and $1.3510, respectively.

Market anticipation is building for the release of US CPI data later on Friday, one of the final major economic indicators before the Federal Reserve's meeting on September 16. Fed funds futures indicate a 71.3% probability of a 25-basis-point hike at the central bank's upcoming meetings, up from 61.2% the previous day, as per the CME Group's FedWatch tool.

Treasury yields have risen by 2.3 basis points to 4.965%, signaling unease in fixed-income markets following the US Treasury Department's decision to triple the size of its long-dated bond repurchase. The yield on US 10-year government bonds is nearing 5%, as the market reassesses the Fed's path higher and the term premium approaches pre-Great Financial Crisis levels.

Barclays analysts remain cautious, stating that bonds are not yet cheap, and catalysts for a rally are not imminent. In the cryptocurrency market, Bitcoin declined by 0.8% to $76,624.32, and Ether dropped by a similar margin to $2,443.18.