Investors increasingly turned toward the greenback as concerns over persistent inflation — driven largely by higher energy prices and geopolitical tensions in the Middle East — continued to reshape expectations for U.S. monetary policy.
The rally pushed the dollar index to a one-month high, putting it on track for a weekly gain of about 1.2%, its sharpest rise since early March.
Treasury Yields Climb as Inflation Concerns Deepen
The dollar’s momentum mirrored a sharp rise in U.S. Treasury yields, which climbed to fresh 11-month highs as traders reassessed the outlook for interest rates.
Markets are now pricing in a significantly higher probability that the Federal Reserve could tighten policy again in December. According to the CME FedWatch Tool, investors now see nearly a 40% chance of another rate hike, up sharply from around 22.5% just a week earlier.
Recent economic data from the United States has reinforced the view that inflationary pressures remain stubborn while the economy continues to show resilience.
Figures released on Thursday showed retail sales rose again in April, while weekly jobless claims pointed to ongoing strength in the labour market despite global uncertainties.
Alvin Liew said inflation risks remain tilted to the upside.
“While we are still cognisant of the softer domestic demand conditions that are being weighed down by rising energy costs, our U.S. CPI forecasts have been revised higher in 2026 again with risks still biased towards the upside,” Liew said.
He added that the Fed may keep interest rates elevated for an extended period.
“We now expect an extended period of pause to cover the remainder of 2026 before the Fed resumes easing in 2027.”
Trump-Xi Talks Under Global Spotlight
Financial markets were also closely monitoring the second day of high-level talks between U.S. President Donald Trump and Chinese President Xi Jinping.
The meeting comes amid heightened geopolitical tensions linked to the ongoing Middle East conflict and renewed global trade concerns.
Trump said discussions with Xi included the issue of Iran and regional stability.
“We want the straits open,” Trump said, while also stressing that neither leader wants Iran to possess nuclear weapons.
Despite the political significance of the summit, market reaction remained relatively cautious as investors waited for clearer signals on trade policy, business access and broader economic cooperation between the world’s two largest economies.
Cliff Zhao described the talks as mildly encouraging but lacking concrete outcomes.
“The meeting is broadly in line with market expectations and slightly constructive at the margin,” Zhao said.
“A better tone is helpful, but markets will still look for more clarity on trade, business access and specific policy arrangements.”
Yuan Retreats as Dollar Strengthens
China’s currency lost ground against the strengthening dollar after briefly touching its highest level in more than three years.
The onshore yuan weakened to 6.7953 per dollar, while the offshore yuan also slipped modestly.
Analysts said the retreat reflected broad-based dollar strength rather than any major deterioration in China’s economic outlook.
Euro, Pound and Commodity Currencies Slide
The dollar’s rally weighed heavily on major global currencies.
The euro dropped to a one-month low and was last trading at $1.1651, leaving the common currency on course for a weekly decline of around 1.1%.
Meanwhile, the Japanese yen remained weak near the 158-per-dollar mark despite fresh domestic data showing a sharp rise in wholesale inflation — a development that could strengthen the case for the Bank of Japan to raise interest rates as early as June.
The British pound also came under pressure, falling to a one-month low of $1.3364 after political uncertainty intensified in the United Kingdom following the resignation of Health Minister Wes Streeting.
Henry Cook warned that the UK’s political instability could further hurt investor confidence.
“The prospect of a potentially disruptive leadership transition and yet another challenging fiscal backdrop heading into the autumn is likely to weigh on sentiment,” Cook said.
“We see the balance of risks to the UK outlook as firmly skewed to the downside.”
Commodity-linked currencies also weakened. The Australian dollar slipped 0.4% from its recent four-year peak, while the New Zealand dollar lost more than half a percent against the greenback.
Investors Brace for Volatile Weeks Ahead
With inflation concerns resurging, geopolitical risks intensifying and central banks reassessing policy paths, analysts say currency markets could remain volatile in the coming weeks.
For now, the U.S. dollar appears to be benefiting from its traditional safe-haven appeal as investors seek stability amid growing uncertainty over global growth, energy prices and international politics.