The U.S. dollar remained firm on Friday, trading close to its strongest level in over two weeks after a more hawkish tone from some Federal Reserve policymakers pushed Treasury yields to one-month peaks. The move in yields and currency markets intensified scrutiny of the Japanese yen after it broke above the 160-per-dollar threshold.
Federal Reserve Chair Jerome Powell ended his eight-year leadership of the central bank with policy unchanged, but the decision was notably split. The Fed voted 8-4 to keep rates on hold - its most divided outcome since 1992 - with three officials dissenting because they no longer support signalling a bias toward easing. That internal division and the shift in tone contributed to a sharp rise in U.S. government bond yields.
Short-term market-sensitive yields rose markedly. The 2-year U.S. Treasury yield, which typically tracks expectations for interest rates, climbed to 3.928%. The 10-year yield rose to 4.421% - levels not seen since March 27. As a result, traders have largely removed expectations for rate cuts this year; market pricing now indicates a 55% probability of a rate increase by April 2027, up from roughly a 20% chance before the Fed decision.
Currency strategists highlighted the change in Fed messaging and broader inflation worries as key drivers. Rodrigo Catril, a currency strategist at National Australia Bank in Sydney, said the divisions within the Fed and concerns about the inflationary effects of the Iran conflict have reduced the bank's easing bias. He also noted that rising oil prices have amplified market nervousness, supporting the dollar both through increased risk aversion and higher U.S. Treasury yields.
The dollar index stood at 98.852 after a 0.3% gain on Wednesday, keeping the currency close to its highest level since April 13. In Asia, the euro was trading at $1.1689 and sterling at $1.34877, each up roughly 0.1% during the session. The Australian dollar changed hands at $0.71285 and the New Zealand dollar at $0.58394, both up around 0.2%.
Market attention is also focused on central bank calendars. The Bank of England and the European Central Bank were set to meet later the same day, with investors watching their guidance amid growing expectations that each could be compelled to raise rates.
At the same time, diplomatic efforts to resolve the Iran conflict remained stalled, maintaining pressure on energy markets. U.S. political developments added to the unease: President Donald Trump was reported to be discussing how to mitigate the consequences of a potential months-long U.S. blockade of Iran's ports with oil industry executives. Oil contracts surged on concerns over extended supply disruptions stemming from the Middle East war, with Brent crude futures approaching their highest levels since June 2022.
Japan intervention watch
The Japanese yen weakened further, trading down 0.1% at 160.16 per dollar, a move that edged it toward levels historically associated with intervention. The Bank of Japan had signalled after its policy meeting earlier in the week that it could raise rates in coming months, yet the currency continued to depreciate.
Since the war began on February 28, the yen has fallen by more than 2%, and market participants have built the largest short-yen position in almost two years, reflecting bets that neither prospective rate hikes nor intervention would be sufficient to reverse the slide.
Analysts at IG cautioned that Japan's Ministry of Finance may be reluctant to intervene too early. They pointed to Japan's vulnerability as a major energy importer and the stalemate in the Middle East as reasons for that caution, suggesting authorities will weigh the timing of any action carefully.
With yields, geopolitical risks and oil prices all contributing to currency and bond moves, markets remained attentive to central bank guidance and developments in the Middle East as the week closed.