Dollar set for best week in two months, yen tests 160

Over the past week, the dollar experienced a remarkable surge, setting a best weekly gain in two months. This momentum was driven by heightened expectations of a larger Federal Reserve rate hike, as traders were eager to capitalize on the prospect of higher US yields. The yen, however, faced pressure, hovering just below the 160 mark against the dollar, prompting Japan to warn of potential intervention if volatility became excessive.

Treasury yields rose due to President Trump's recent comments about the US not needing an Iran deal, which raised concerns about Middle Eastern oil supply and fueled inflation expectations. The Federal Reserve's hawkish remarks and stronger-than-expected US inflation data further fueled speculation about a more significant rate increase next month.

Analysts noted that the absence of a Middle East peace deal could be the biggest risk to the dollar's strength, as it would diminish support from high energy prices and its safe-haven status. The euro, meanwhile, saw a slight dip, edging up by just 0.1 percent to $1.1065, marking its weakest point against the dollar since April 2025, and down 0.7 percent for the week.

Fed officials have indicated concerns about persistently high US inflation, with some suggesting openness to a 50 basis point rate increase if price pressures persist. Traders were pricing in a 12.1 percent chance of such a hike next month, up from zero percent the previous week. The dollar index reached 103.17, near its highest level since April 2025, marking a 0.9 percent gain for the week, the most since September.

Japan's Finance Minister warned of potential intervention in the yen if volatility becomes too extreme, with the currency weakening by 0.9 percent this week and now trading around 159.90 per dollar.