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

The US dollar maintained its strength, holding near its highest levels of the past week, while the Japanese yen declined for a second consecutive day on Friday. The renewed concerns over potential energy supply disruptions in the Middle East drove up bond yields and oil prices, contributing to the dollar's resilience. The US dollar index, which tracks the greenback's performance against six currencies, remained unchanged at 99.081, after climbing 0.3% on Thursday to a peak not seen since September 7.

This gain was driven by risk-averse flows, as higher energy prices increased the likelihood of a Federal Reserve interest rate hike next week. Analyst Tony Sycamore from IG in Sydney noted that the dollar benefited from the surge in energy prices, which lifted the probability of a Fed hike to 70%. Energy prices continued their upward trajectory, surging 1.2% to $108.96 a barrel as trading resumed in Asia.

Both the major benchmark crude oils, Brent and WTI, broke the $100 mark earlier in the week, with WTI futures surging above the threshold for the first time since May 21 after Yemen's strategic port city of Mocha fell under the control of Houthi rebels. The euro and the British pound both held steady against the dollar at $1.1613 and $1.3510, respectively.

Meanwhile, markets were eagerly awaiting the release of US consumer price index (CPI) data later on Friday, one of the final economic indicators before the Federal Reserve's next meeting. Fed funds futures indicated a 71.3% chance of a 25-basis-point interest rate hike at the Fed's forthcoming two-day meeting, up from 61.2% the previous day.

Bond markets remained cautious, with the US Treasury Department tripling the size of its long-dated bond repurchase program and bond volatility reaching a monthly high. The yield on US 10-year government bonds rose 2.3 basis points to 4.965%. In the cryptocurrency market, Bitcoin fell 0.8% to $76,624.32, while Ether declined a similar amount to $2,443.18.