The dollar strengthened alongside U.S. Treasury yields on Friday, maintaining its position near a 40-year high against the yen. This movement was influenced by a surge in oil prices and the resurgence of a global trade war, which heightened concerns regarding inflation. Sterling languished around a three-week low, trading at $1.3313 in early Asia, following a nearly 0.5% decline overnight against a resurgent dollar. The euro was similarly experiencing losses and fluctuated at $1.1376, receiving minimal support from the anticipation of forthcoming European Central Bank rate hikes, while the dollar remained close to a three-week high against a basket of currencies at 101.45. The dollar’s resurgence occurred as oil prices rose above $100 a barrel for the first time since May, following attacks by Yemen’s Houthis on two Saudi oil tankers in the Red Sea, thereby extending the Middle East conflict to a second significant shipping chokepoint. U.S. President Donald Trump has pledged “major military punishment” for Iran and its Houthi allies.

In a move that contributes to the ongoing inflationary pressures, the Trump administration announced the imposition of new tariffs of 10% and 12.5% on goods from 60 trading partners, citing allegations of insufficient enforcement of forced labour bans. This decision comes on the heels of the expiration of a temporary 10% global tariff. “The world must be prepared for ​a double whammy of tariffs, because essentially oil is a tariff… and the independent supply disruptions… there is a certain actual quantity-determined disruption… then there’s a price shock from the (trade) tariffs as well,” said Vishnu Varathan. “I think the world pretty much is more comfortable guessing Trump’s style with tariffs, ​which is to say, big on upfront escalation and open to beg and negotiation. Whereas with Iran and the Houthis, you can’t undrop a ​bomb, can you?”

The recent upheaval in the Middle East, coupled with escalating trade tensions, has resulted in an increase in U.S. Treasury yields driven by inflation concerns, as the benchmark 10-year yield climbed to an over 18-month peak exceeding 4.7% overnight. The 30-year yield remained significantly above the 5% threshold, whereas 2-year yields approached their peak levels since February 2025, currently recorded at 4.3555%. “I’m sure the question about whether 30-year yields will hit 6% is not far away, and your 10-year yield at 5% may be now more a bet than a fear,” said Varathan. The strength in the dollar, meanwhile, indicated further challenges for the yen, which remained anchored near a 40-year low at 163.86 per dollar. The U.S. Treasury Department on Thursday cautioned against excessive volatility in the yen and advocated for additional interest rate increases by the Bank of Japan. In other currencies, the Australian dollar remained relatively stable at $0.6968, having experienced a decline of more than 0.4% overnight, while the New Zealand dollar increased by 0.08% to $0.5776, following a drop of 0.8% in the prior session.

Investors now approach the upcoming week confronted with a series of significant central bank decisions, notably from the Federal Reserve. Policymakers are tasked with addressing escalating inflationary pressures, despite the Fed having reduced its forward guidance. “Removing forward guidance or being less generous with forward guidance, our read on that is that that is an actual tightening of financial conditions without actually ⁠having to ​hike rates,” said Leonard Kwan. “Because what you ​are doing is you are introducing a little bit more uncertainty, you are retaining optionality within the Fed to be to move in any direction they want. So what that ​actually means for risk takers is that there’s a potential for more volatility to come out from Fed events.”