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

The dollar is poised for two consecutive weekly gains, driven by a surge in Treasury yields and anticipation of additional Federal Reserve rate hikes, according to market reports. This marks the first instance of such gains in over three months. The strength of the dollar pushed the euro to a two-month low, while the British pound struggled near a three-month low.

Market reactions have been swift after the Federal Reserve's recent tightening of policy, fueled by robust economic data and heightened concerns over energy supply. The dollar index, which compares the US currency to a group of peers, has risen more than 1% this week, reaching a two-month high. However, the rally shows signs of slowing, briefly dropping slightly to 101.2.

While higher yields are expected to bolster the dollar, concerns persist about the US fiscal situation and the unpredictability of policy decisions. Khoon Goh, head of Asia research at ANZ, attributes the dollar's difficulty in maintaining its upward trajectory to these ongoing uncertainties. Oil prices surged over 3% on Thursday, reaching a one-week high, after a Houthi missile strike on Saudi Arabia reignited worries about potential supply disruptions and inflation risks.

The Japanese yen hovered close to a three-week low, trading near 158.8 per dollar, following markets' assessment that the Bank of Japan's recent rate hike and policy guidance were insufficiently hawkish. Despite these moves, traders remain cautious about the possibility of official intervention in Tokyo, with a former Bank of Japan board member suggesting the central bank could raise rates every quarter.

The bank's revised 12-month forecast for the USD/JPY pair was lowered to 150 from 165. The Australian dollar saw a slight increase to $0.7015, while the New Zealand dollar remained flat at $0.5663. The Reserve Bank of Australia is anticipated to raise interest rates by 25 basis points to a near 15-year high of 4.60% next week, marking the final rate hike in the tightening cycle.

Meanwhile, the offshore yuan remained stable at 6.715 per dollar, as a recent Trump-Xi summit in Washington City yielded no significant breakthroughs on contentious topics, including AI, trade, Taiwan, and the Iran conflict.