Dollar set for weekly gains as yields surge

Dollar strength surged, propelling the euro to a two-month low of US$1.1370 and setting the stage for a third consecutive weekly decline, its most severe losing streak since late 2025. The dollar's upward momentum marked its first consecutive weekly gains in over three months, with the greenback nearing multi-month peaks. Treasury yields skyrocketed, bolstering the dollar's position and fueling speculative bets on additional Federal Reserve rate hikes.

The dollar index experienced a more than 1% rise this week, reaching a two-month high and marking its first consecutive weekly gains since June.

However, the rally's momentum appeared to wane, with the dollar index touching a low of 101.2. While higher yields offered some support, lingering concerns about the US fiscal position and the unpredictable nature of US policymaking hindered the dollar's continued ascent, according to Khoon Goh, head of Asia research at ANZ. Oil prices leaped over 3% on Thursday, reaching a one-week high, after a Houthi missile strike on Saudi Arabia reignited concerns about potential supply disruptions and inflation risks.

The Japanese yen hovered near a three-week low at 158.8 per dollar, as markets deemed the Bank of Japan's rate hike to a 31-year high and policy guidance insufficiently hawkish. Traders remained cautious of possible official intervention following Tokyo's verbal warnings, and a former BOJ board member suggested the central bank could raise rates every quarter.

Goldman Sachs revised its 12-month USD/JPY forecast downward to 150 from 165, citing faster rate hikes that diminished the inflationary impact of expansionary fiscal policy.

The Australian dollar edged higher to US$0.7015, while the New Zealand dollar remained flat at US$0.5663. The Reserve Bank of Australia was expected to raise interest rates by 25 basis points to a near 15-year high of 4.60% the following week, marking the final rate increase in the tightening cycle. Meanwhile, the offshore yuan traded unchanged at 6.715 per dollar, with a recent Trump-Xi summit in Washington yielding no breakthroughs on contentious issues such as AI, trade, Taiwan, and the Iran conflict.