Dollar Strengthens as Inflation Risks Push U.S. Yields Higher

The U.S. dollar remained supported on Friday as rising Treasury yields increased demand for the currency.

Higher oil prices and renewed global trade tensions strengthened inflation concerns. Meanwhile, the dollar stayed close to a 40-year high against the Japanese yen.

Pound and Euro Remain Under Pressure

The British pound traded near a three-week low at approximately $1.3310 during Asian trading.

Sterling had fallen almost 0.5% during the previous session as the dollar gained strength.

The euro also struggled to recover and traded near $1.1381. Expectations of potential European Central Bank interest rate increases provided little support.

At the same time, the U.S. Dollar Index remained close to a three-week high at around 101.41.

Oil Above $100 Fuels Inflation Concerns

Brent crude climbed back above $100 per barrel after Yemen’s Houthi group attacked two Saudi oil tankers in the Red Sea.

The attacks expanded the Middle East conflict to another major shipping route and raised fears of further disruption to global energy supplies.

U.S. President Donald Trump warned of significant military retaliation against Iran and its Houthi allies.

The possibility of prolonged supply disruptions helped push oil prices higher and increased concerns about energy-driven inflation.

New U.S. Tariffs Add Further Price Pressure

The Trump administration also announced tariffs of 10% and 12.5% on imports from 60 trading partners.

The measures were linked to claims that those countries had not properly enforced bans on goods produced through forced labor.

The new duties were introduced as a temporary 10% global tariff expired.

Higher import costs could add another layer of inflationary pressure alongside rising energy prices.

Markets Face a Double Inflation Shock

Vishnu Varathan, head of Asia-Pacific macro strategy at Mizuho, described the situation as a potential double shock.

Oil supply disruptions could raise prices through reduced availability. At the same time, new tariffs could increase the cost of imported goods.

He noted that markets may be more familiar with negotiating around U.S. trade policy than dealing with the lasting consequences of military escalation.

Treasury Yields Reach Multi-Month Highs

Renewed trade tensions and the worsening Middle East conflict pushed U.S. Treasury yields higher.

The benchmark 10-year yield climbed above 4.7%, reaching its highest level in more than 18 months.

The 30-year yield remained comfortably above 5%, while the two-year yield rose to its highest level since February 2025 at approximately 4.36%.

Varathan suggested that markets may increasingly consider the possibility of the 10-year yield approaching 5% and the 30-year yield moving toward 6%.

Strong Dollar Keeps Yen Near Historic Low

The stronger dollar placed additional pressure on the Japanese yen.

The currency remained close to a 40-year low at around 163.80 yen per dollar.

The U.S. Treasury Department warned against excessive volatility in the yen and encouraged the Bank of Japan to continue raising interest rates.

However, the wide gap between U.S. and Japanese yields continued to support the dollar against the yen.

Australian and New Zealand Dollars Stabilize

The Australian dollar rose slightly to around $0.6978 after falling more than 0.4% during the previous session.

The New Zealand dollar also recovered modestly to approximately $0.5778 after losing 0.8% on Thursday.

Despite these small gains, both currencies remained vulnerable to changes in global risk sentiment and U.S. interest rate expectations.

Federal Reserve Decision Comes Into Focus

Investors are now preparing for several major central bank meetings, including the Federal Reserve’s upcoming policy decision.

Fed officials must assess rising inflation risks from tariffs, oil prices and geopolitical tensions.

At the same time, the central bank has reduced the amount of guidance it provides about future interest rate decisions.

Less Fed Guidance Could Increase Volatility

Leonard Kwan, a fixed-income portfolio manager at T. Rowe Price, said reduced forward guidance could tighten financial conditions even without another rate increase.

Providing fewer signals creates greater uncertainty about the Fed’s next move.

That uncertainty may allow policymakers to retain more flexibility. However, it could also produce greater volatility around future Federal Reserve meetings.

The dollar’s near-term direction will therefore depend on Treasury yields, oil prices, trade policy and the Fed’s response to renewed inflation risks.