Dollar Holds Near 19-Month High as Fed Rate Hike Bets Lift US Yields, Yen Weakens

The dollar held near 19-month highs on Friday and was set for its biggest weekly rise in two months, as expectations of a larger US interest rate hike pushed up Treasury yields. The yen hovered below the 160-per-dollar mark, prompting Tokyo to warn it would respond to excessive currency movements.

Treasury yields rose after President Donald Trump said the United States did not need a deal with Iran, fuelling concerns about Middle Eastern oil supplies. The remarks lifted crude prices and, in turn, inflation expectations. Combined with hawkish comments from Federal Reserve officials and stronger-than-expected US inflation data this week, traders are now weighing a larger-than-usual Fed rate increase next month.

Rate hike bets lift Treasury yields

Two-year Treasury yields have risen 33 basis points so far this week to around 4.85%, putting them on course for their biggest weekly jump since 2024. Fed officials this week warned that US inflation remained stubbornly elevated, with some signalling openness to a 50-basis-point rate increase if price pressures failed to ease. Traders are pricing in a 12.1% chance of such a hike next month, up from zero last week, according to the CME FedWatch tool.

Dollar index near April 2025 high

The dollar index, which measures the greenback against a basket of currencies, stood at 103.17, near its highest level since April 2025. For the week, the dollar was set to gain 0.9%, its biggest weekly advance since September. The euro edged up 0.1% to $1.1065, after hitting its lowest level against the dollar since April 2025. For the week, it was down 0.7%, putting it on track for its largest weekly loss since late September.

Yen weakness draws Tokyo warning

The yen was steady at 159.90 per dollar, around its weakest level since early September, fuelling concerns about possible government intervention. The currency has weakened 0.9% this week, putting it on track for its biggest weekly loss since September. Japanese Finance Minister Satsuki Katayama said on Friday that the government would respond appropriately to currency volatility. Japan spent 15.4 trillion yen ($96.5 billion) to support the currency after it fell to a four-decade low of 163.99 per dollar in late July.

The biggest risk to dollar strength would be a Middle East peace deal, said Nick Rees, head of macro research at Monex, as this would reduce the support the currency receives from elevated energy prices and its safe-haven status.

"Absent that happening, we think the dollar is likely to continue to at least remain around current levels if not strengthen slightly as we look ahead," Rees said.