The dollar held near 19-month highs on Friday and was set for its biggest weekly rise in two months as bets on a larger rate hike pushed up US yields and the yen hovered below the 160 mark, prompting Tokyo to warn it would respond to excessive moves.
Treasury yields rose after President Donald Trump's comment that the US did not need a deal with Iran stoked worries about Middle Eastern oil supply, lifting crude prices and, with them, inflation expectations.
The move, together with hawkish comments from Federal Reserve officials and this week's stronger-than-expected US inflation data, has left traders weighing the prospect of a larger-than-usual Fed rate hike next month.
Two-year Treasury yields have risen 33 basis points so far this week to around 4.85%, on course for their biggest weekly jump since 2024.
The biggest risk to dollar strength is a Middle East peace deal, said Nick Rees, head of macro research at Monex, as that would diminish the support it draws from high 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.
The euro edged up 0.1% to $1.1065, after hitting its lowest level against the dollar since April 2025. For the week, it is down 0.7%, on track for its largest weekly loss since late September.
Fed officials this week warned that US inflation remains stubbornly elevated, with some signalling openness to a 50-basis-point rate increase if price pressures fail to ease. Traders are pricing in a 12.1% chance of such a hike next month, up from 0% last week, the CME FedWatch tool showed.
The dollar index, which measures the greenback against a basket of currencies, was at 103.17, near its highest since April 2025. For the week, the dollar is set to gain 0.9%, the most since September.
YEN INTERVENTION IN FOCUS
The yen was steady at 159.90 per dollar, around its weakest since early September, fuelling concerns about possible intervention. The currency has weakened 0.9% this week, on track for its biggest weekly loss since September.
Japanese Finance Minister Satsuki Katayama said on Friday the government would respond appropriately to currency volatility.
Japan spent 15.4 trillion yen ($96.5 billion) to bolster the currency after it sank to a four-decade low of 163.99 per dollar in late July.
Markets will be cautious around this level, said Monex's Rees, adding that he expects the trigger for intervention somewhere a little higher than 160.
The Australian dollar has fallen about 3.4% so far this month, making it the worst-performing G10 currency against the greenback. Australia is the only G10 country for which markets are pricing a rate cut next year. The Aussie was last at $0.6794.
The dollar was little changed against the Swiss franc at 0.836, hovering near a one-month high.
Among cryptocurrencies, bitcoin fell 3.8% to $68,759, dropping below the key $70,000 level to its lowest since August. Ether also dropped 4% to $1,933.49.
