The dollar advanced alongside U.S. Treasury yields on Friday, positioning itself for its most significant weekly increase in over two months, as rising inflationary pressures from elevated energy prices bolstered expectations of a Federal Reserve rate hike this year. Markets were closely monitoring the second day of a summit between U.S. President Donald Trump and his Chinese counterpart Xi Jinping, as Trump aimed for economic victories from Beijing amid the ongoing conflict in the Middle East. Trump expressed that his tolerance for Iran is diminishing, emphasizing that both he and Xi are opposed to Iran acquiring nuclear weapons and desire to keep the straits accessible. The market’s response to the discussions has been relatively subdued as investors look for further information. The onshore yuan retreated from its highest level against the dollar in more than three years due to broad dollar strength and was last at 6.7953 per dollar.

Its offshore counterpart decreased by 0.14% to 6.7961.”The meeting aligns well with market expectations and is marginally constructive,” stated Cliff Zhao. A more refined tone is beneficial; however, the markets will continue to seek greater clarity regarding trade, business access, and specific policy arrangements. In the broader market, the dollar strengthened as U.S. Treasury yields reached 11-month highs amid increasing speculation of a Federal Reserve rate hike this year. In relation to the U.S. dollar, the euro has declined to a one-month low, with its most recent trading position at $1.1651, reflecting a decrease of 0.15%. The common currency is projected to decline approximately 1.1% for the week. The yen remained under pressure, trading below 158 per dollar, even as domestic data indicated a rise in wholesale inflation, strengthening the argument for the Bank of Japan to consider an interest rate hike as early as June. The dollar index, in the meantime, climbed to a one-month high and is poised for a weekly gain of approximately 1.2%, marking its most significant rise since early March.

The dollar rally has been gaining momentum throughout the week, supported by indications that, although domestic inflation is rising, the U.S. economy continues to demonstrate resilience in the face of the ongoing Middle East conflict. Data released on Thursday indicated that U.S. retail sales experienced an additional increase in April, while the weekly initial jobless claims figures suggested a stable labour market. Investors are currently assessing a nearly 40% probability that the Fed may increase rates in December, a notable rise from the 22.5% likelihood observed just a week prior, as indicated. “While we remain aware of the weaker domestic demand conditions impacted by increasing energy costs, our U.S. CPI forecasts have been adjusted upward for 2026, with risks still leaning towards the upside,” stated Alvin Liew. We now anticipate a prolonged period of inactivity to encompass the rest of 2026 before the Fed begins to ease again in 2027.

In other currencies, sterling declined to a one-month low of $1.3364, experiencing a 0.9% drop in the previous session after the resignation of British health minister Wes Streeting, which has intensified the political crisis in that region. “The prospect of a potentially disruptive leadership transition and yet another challenging fiscal backdrop heading into the autumn is likely to weigh on sentiment,” said Henry Cook. The balance of risks to the UK outlook appears to be decidedly tilted towards the downside. The Australian dollar pulled back from its recent four-year high, influenced by the strength of the greenback, and was trading 0.4% lower at $0.7190. The New Zealand dollar experienced a decline of 0.55%, settling at $0.5879.