Dollar falls as oil cools but set for weekly gain, yen rallies

The dollar experienced a drop on Friday but is poised for a second week of gains, driven by heightened expectations of rate hikes. Meanwhile, the yen surged following Japan's reaffirmation of its commitment to the stance that guided the country's July joint intervention with the US. The euro edged up 0.2% to $1.141 as energy prices declined, tempering bets about a Federal Reserve rate increase, but was on track for a third weekly loss after hitting a two-month low on Thursday.

The British pound rose 0.3% to $1.326, buoyed by comments from Bank of England Governor Andrew Bailey that suggested a hawkish stance, but remained near a three-month low and was set for a second consecutive weekly decline of 1%. The market has been quickly re-evaluating the trajectory of US interest rates since the Federal Reserve's recent tightening.

Strong economic data, new concerns about energy supply, and a series of hawkish remarks from Fed officials have reinforced this view. The dollar index, which tracks the US currency against a group of peers, rose to a two-month high on Thursday and was on track for its first consecutive weekly rise since June, but it has since slipped 0.3% on Friday to 100.96.

Although higher yields could give the dollar a boost, lingering doubts about the US's fiscal situation and the unpredictability of US policymaking continue to hinder its rally. Khoon Goh, ANZ's head of Asia research, noted that these factors are likely the reason why the dollar has struggled to keep gaining despite rising yields.

Oil prices fell on Friday due to signs of easing supply disruptions and hopes of progress in US-Iran talks, but crude prices remained near a one-week high as a Houthi missile strike on Saudi Arabia kept Middle East tensions high. The yen strengthened by 0.8% to 157.65 per dollar after Japan's Finance Minister Satsuki Katayama said US President Donald Trump expressed concern about yen weakness during a summit with Japanese Prime Minister Sanae Takaichi.

Katayama asserted that this strengthened the shared US-Japan stance behind the July joint intervention, and she and Treasury Secretary Scott Bessent would remain in close contact to address renewed yen weakness. This statement underscores Tokyo's ongoing efforts to portray the measures to prevent yen weakness as a sustained joint strategy.

The yen, however, was on track for a second weekly decline after markets deemed the Bank of Japan's rate hike last week to be a 31-year high and its latest guidance as insufficiently hawkish. The offshore yuan remained steady at 6.721 per dollar, as a Trump-Xi summit in Washington produced no breakthrough on contentious issues like AI, trade, Taiwan, and the Iran war.

The Australian dollar climbed 0.3% to $0.703, and Australia's Reserve Bank is expected to raise interest rates by 25 basis points to a near 15-year high of 4.60% next week.