Dollar Strengthens as Fed Rate Hike Expectations Increase
The U.S. dollar gained support on Thursday as rising Treasury yields reinforced expectations that the Federal Reserve could raise interest rates later this year.
Investor attention also shifted toward the closely watched summit between U.S. President Donald Trump and Chinese President Xi Jinping.
The two-day meeting in Beijing is expected to focus on trade relations, Taiwan, artificial intelligence, and broader geopolitical tensions between the world’s two largest economies.
Trump and Xi Talks Focus on Taiwan and Trade
During the summit, Xi Jinping told Trump that trade negotiations were making progress but warned that disagreements surrounding Taiwan could seriously damage relations between Washington and Beijing.
Trump described the event as potentially the “biggest summit ever,” underlining the significance of the discussions.
As talks got underway, the Chinese yuan remained near a three-year high against the U.S. dollar. China’s onshore yuan traded close to 6.7840 per dollar, while the offshore yuan touched 6.7817 per dollar, its strongest level in more than three years.
Analysts at Barclays said they expect the yuan to remain relatively stable in the near term, which could help support smoother negotiations between the United States and China.
However, Barclays also warned that Chinese authorities may intervene if the currency strengthens too quickly.
Dollar Holds Firm Against Major Currencies
In broader currency markets, the dollar remained strong against several major currencies.
The euro traded mostly unchanged at $1.1714 and was on track for a weekly decline of 0.6%, marking its largest weekly drop in two months.
The British pound traded at $1.3524 and was heading toward a weekly loss of roughly 0.8%, pressured partly by domestic political uncertainty in the United Kingdom.
Against a basket of major currencies, the U.S. Dollar Index stood at 98.48, up more than 0.6% for the week.
The dollar briefly reversed gains against the Japanese yen, with USD/JPY trading slightly lower at 157.87 after comments from Kazuyuki Masu boosted the yen.
Masu stated that the Bank of Japan should move quickly to raise interest rates if the Japanese economy does not show signs of slowing down.
Rising Inflation Boosts Treasury Yields
The dollar has also been supported by growing evidence of inflationary pressures in the United States.
New economic data released this week showed U.S. producer prices recorded their largest increase in four years during April.
Earlier data also revealed stronger-than-expected consumer inflation, pushing the annual inflation rate to its fastest pace in three years.
Carol Kong, currency strategist at Commonwealth Bank of Australia, said the latest inflation data is unlikely to be welcomed by Federal Reserve officials.
The U.S. Senate also approved Kevin Warsh as the new Fed chair, placing the former financier at the head of the U.S. central bank.
Kong said markets now expect the Federal Open Market Committee (FOMC) to begin tightening monetary policy starting in December, with three potential rate hikes currently projected.
Treasury Yields Climb on Fed Expectations
According to CME FedWatch data, markets are pricing in a 31.8% chance of a Federal Reserve rate hike in December, compared with just over 16% one week ago.
Rising inflation concerns and shifting interest rate expectations pushed U.S. Treasury yields higher, with longer-dated yields reaching their highest levels since mid-2025.
The two-year Treasury yield held near 3.98%, while the benchmark 10-year Treasury yield stood at 4.47% after recently approaching a one-year high.
Australian Dollar Near Multi-Year High
Elsewhere in currency markets, the Australian dollar remained close to a four-year high, supported by expectations of tighter monetary policy in Australia.
The currency traded at $0.7255, while the New Zealand dollar edged slightly lower to $0.5932.
