The dollar rode U.S. Treasury yields higher on Friday and hovered near a 40-year peak against the yen, as a spike in oil prices and a renewed global trade war raised the stakes for inflation.
Sterling languished around a three-week low and bought $1.3313 in early Asia trade, after sliding nearly 0.5% overnight against a resurgent dollar.
The euro was similarly nursing losses and wobbled at $1.1376, drawing little support from the prospect of imminent European Central Bank rate hikes, while the dollar held near a three-week top against a basket of currencies at 101.45.
The dollar's resurgence came as oil prices climbed back above $100 a barrel for the first time since May after Yemen's Houthis struck two Saudi oil tankers in the Red Sea, extending the Middle East war to a second major shipping chokepoint.
U.S. President Donald Trump promised "major military punishment" for Iran and its Houthi allies.
Adding to the inflationary pulse, the Trump administration said it will impose new tariffs of 10% and 12.5% on goods from 60 trading partners over allegations of lax enforcement of forced labour bans, just as a temporary 10% global tariff expires.
"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, Mizuho's head of macro strategy for Asia-Pacific.
"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 fresh turmoil in the Middle East and renewed trade tensions sent U.S. Treasury yields higher on inflation fears, with the benchmark 10-year yield rising to an over 18-month high above 4.7% overnight. [US/]
The 30-year yield held well above the 5% level, while 2-year yields were near their highest since February 2025 and last stood 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 spelled more pain for the yen, which remained pinned near a 40-year low at 163.86 per dollar.
The U.S. Treasury Department on Thursday warned against excessive yen volatility and called for further interest rate hikes by the Bank of Japan.
In other currencies, the Australian dollar was little changed at $0.6968, having fallen more than 0.4% overnight, while the New Zealand dollar edged 0.08% higher to $0.5776, after sliding 0.8% in the previous session.
Investors now head into next week facing a slew of major central bank decisions including from the Federal Reserve, where policymakers must contend with mounting inflationary pressures even as the Fed has pared back 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, a fixed-income portfolio manager at T. Rowe Price.
"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."
