Dollar near 19-month high on Fed hike bets, yen tests 160

The dollar climbed near a 19-month peak on Friday, as traders grew confident of a substantial Federal Reserve interest rate increase. This surge pushed the Japanese yen back towards the critical 160 mark, prompting traders to watch for possible intervention. Treasury yields surged after U.S. President Donald Trump dismissed the prospect of a deal with Iran, and market participants weighed the likelihood of a more aggressive Fed rate hike next month.

Two-year Treasury yields jumped 34 basis points over the past two sessions, marking the steepest two-day rise in three and a half years. The euro slipped 0.1% to $1.1049, hovering close to its lowest point against the dollar since April 2025, marking its largest weekly decline since late September. Fed officials have expressed concerns over persistently high U.S. inflation, with some hinting at a 50-basis-point increase if price pressures do not subside.

The probability of a large rate hike next month has risen to 14.5%, up from 0% the previous week, according to the CME FedWatch tool. Investors are also monitoring the turbulence in technology stocks following the departure of Nvidia CEO Jensen Huang, a sector already grappling with funding and regulatory issues. Analyst Carol Kong from Commonwealth Bank of Australia cautioned that a sharp decline in equity markets could have a negative impact on the U.S. dollar.

However, she believes there is potential for the dollar to maintain its momentum in the short term, especially with upcoming Fed officials' remarks. If further support emerges for a 50-basis-point rate hike, the dollar could see additional upside. The Japanese yen held steady at 159.875 per dollar, near its lowest level since early September, raising worries about potential intervention.

Japanese Finance Minister Satsuki Katayama stated that the government would respond appropriately to currency volatility. The dollar index, which tracks the greenback against a basket of currencies, fell 0.05% to 103.17, remaining at its highest since April 2025. The Australian dollar weakened by approximately 2.5% over the past month, becoming the worst-performing G10 currency against the dollar and the only one with rate cuts being priced in for next year. It was last at $0.68 in early trading.