Dollar set for weekly gains as yields surge, Fed bets build

The US dollar was poised for consecutive weekly gains on Friday, buoyed by surging Treasury yields and anticipations of additional Federal Reserve rate hikes, propelling it to levels not seen in months. The euro slipped to a two-month low, while the British pound languished near a three-month low, both on track for their worst weekly performances in recent months.

This shift in market sentiment followed the Federal Reserve's recent tightening policy and robust economic data, coupled with heightened concerns over energy supply. The dollar index, tracking the greenback's performance against a basket of currencies, surged over 1% this week, marking its first back-to-back weekly gains since June, though momentum was waning as it settled at 101.2.

Industry analyst Khoon Goh noted that sustained concerns about the US fiscal position and policy unpredictability have hampered the dollar's rally, despite rising yields. Oil prices surged over 3% to a one-week high after Houthi missile strikes on Saudi Arabia reignited fears of supply disruptions, amplifying inflation risks. The Japanese yen hovered near a three-week low, as hawkish remarks from the Federal Reserve, including Philadelphia Fed President Anna Paulson and New York Fed President John Williams, boosted expectations for further rate hikes.

The yen's weakness was tempered by caution over potential official intervention, with concerns over Tokyo's verbal warning and a former BOJ board member suggesting rates could rise every quarter. Goldman Sachs revised its USD/JPY forecast downward to 150 from 165, citing reduced inflationary pressure from aggressive rate hikes. Meanwhile, the Australian dollar edged higher, and the New Zealand dollar remained flat.

The Reserve Bank of Australia was poised to lift rates by 25 basis points to a near 15-year high of 4.60% the following week, marking the final increase in the tightening cycle. Meanwhile, the offshore yuan remained flat at 6.715 per dollar, as a recent summit between Trump and Xi in Washington yielded no breakthroughs on critical issues such as technology, trade, Taiwan, and the Iran conflict.