Dollar Posts First Back-to-Back Weekly Gains in Three Months as Euro and Pound Continue to Slide
nashnova research
The dollar index rose over 1% this week to a two-month high, powered by Treasury yields at 20-year peaks and hawkish Fed rhetoric; this means the high-rate squeeze on major currencies is unlikely to ease soon.
What is driving the dollar rally?
Treasury sell-offs deepened, pushing long-end yields to multi-year records — giving the dollar a clear yield-advantage bid.
Houthi missile strikes on Saudi Arabia sent oil up over 3% in a single day, stoking inflation fears. This means → markets are betting the Fed cannot pivot dovish, handing dollar bulls an extra catalyst.
In plain terms = higher oil → harder to cool inflation → harder to cut rates → stronger dollar. That is the causal chain at work.
What did Fed officials actually say?
Philadelphia Fed President Anna Paulson said "further modest tightening may be needed."
New York Fed President John Williams called another rate hike this year "likely appropriate."
This means → multiple officials sent a coordinated hawkish signal, and market pricing for another hike kept climbing.
Why did the rally stall on Friday?
The dollar index slipped to around 101.2 on Friday, trimming the week's gains.
ANZ's Head of Asia Research Khoon Goh noted that while high yields should support the dollar, persistent concerns over U.S. fiscal health and policy uncertainty are capping its upside.
In plain terms = high yields normally push the dollar higher, but if those yields stem from fiscal dysfunction, investors hesitate — that is the logic behind Friday's pullback.
How far have the euro, pound, and yen fallen?
The euro hit a two-month low of $1.1370, marking its third straight weekly decline — the longest losing streak since late 2025.
Sterling hovered near a three-month low of $1.3220, posting its biggest weekly drop in four months.
The yen traded at 158.8 per dollar, stuck near a three-week low. This reflects the market's view that the Bank of Japan's guidance was not hawkish enough, despite raising rates to a 31-year high.
What is the outlook for the yen?
Japanese authorities kept up verbal intervention warnings, forcing some yen shorts to pull back; a former BOJ board member said the central bank can now hike once per quarter.
Goldman Sachs cut its 12-month dollar-yen forecast from 165 to 150, arguing that a faster hiking pace has reduced the inflationary impact of expansionary fiscal policy.
This means → if the BOJ truly accelerates tightening, yen depreciation pressure should gradually ease — but in the short term, dollar strength still dominates.
What about other currencies, and what is the key to watch next?
The Australian dollar edged up to $0.7015; the RBA is expected to hike 25 bps to 4.60% next week, likely the final move of this tightening cycle.
Offshore renminbi held steady at 6.715 per dollar; a closed-door Trump–Xi summit in Washington produced no tangible breakthrough.
In plain terms = whether the dollar can extend its run hinges on one core tension: can markets reprice the gap between where Treasury yields are heading and how sustainable U.S. fiscal policy really is.
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