TLDR
- The greenback gained over 1% this week, marking its largest weekly advance since early March
- Fed rate hike probability for December jumped to above 65%, compared to less than 20% seven days earlier
- U.S.-Iran standoff keeps energy prices high, amplifying inflation concerns
- The British pound dropped to a five-week trough amid UK Prime Minister Keir Starmer’s leadership crisis
- Trump-Xi talks concluded with minimal market movement, though Strait of Hormuz closure remained central to discussions
The greenback delivered its most robust weekly showing in more than eight weeks on Friday, climbing over 1% versus a currency basket and touching a four-week peak of 99.203 on the DXY index.
The surge was fueled by climbing U.S. Treasury yields, which reached their highest levels in a year, combined with intensifying speculation that the Federal Reserve might tighten monetary policy before year-end.
Market participants now assign a greater than 65% probability to a Fed interest rate increase by December. A mere seven days ago, that likelihood stood under 20%, based on CME FedWatch tool data. Traders are also fully anticipating a rate adjustment by March 2027.
This dramatic recalibration followed a sequence of better-than-anticipated U.S. economic indicators. Import and wholesale price figures both exceeded projections earlier in the week. April retail sales posted gains, while weekly unemployment claims suggested labor market resilience.
Escalating friction between Washington and Tehran continues to amplify inflationary pressures. With the Strait of Hormuz still blocked, oil prices remain elevated. Rising energy expenses are permeating broader inflation metrics, strengthening arguments for Federal Reserve intervention.
“The dollar is catching up with the strong data we’ve seen this week,” said Francesco Pesole, FX strategist at ING. “It feels like there’s a realisation that the U.S. story in an energy crisis may just end up being much better than many other places in the world.”
Sterling Hit by Political Uncertainty
The British pound tumbled to a five-week nadir against the dollar, briefly touching $1.3332 before moderately recovering to $1.3347. The currency is tracking toward its sharpest weekly decline since November 2024.
Prime Minister Keir Starmer confronts mounting pressure following disappointing local election outcomes. Greater Manchester Mayor Andy Burnham signaled intentions to pursue a parliamentary position to launch a leadership bid. Jefferies economist Mohit Kumar observed that investors worry a more progressive leader might expand Britain’s fiscal shortfall.
The euro similarly weakened versus the dollar, sliding to a four-week low of $1.1632 and poised to surrender 1.3% for the week.
Trump-Xi Summit Ends With Little Market Impact
A two-day summit between U.S. President Donald Trump and Chinese President Xi Jinping concluded Friday. Markets barely reacted. Beijing warned Washington over Taiwan and said the U.S.-Iran war “should never have started.”
Trump indicated his patience with Iran was diminishing and noted both he and Xi desire the Strait of Hormuz reopened and reject Iran possessing nuclear capabilities.
The onshore yuan retreated from a three-year peak against the dollar to 6.8038, weighed down by widespread dollar momentum.
Across Asia, the yen depreciated to 158.47 per dollar despite robust domestic wholesale inflation readings. The Singapore dollar, Korean won, and Philippine peso also declined modestly.
The dollar advanced 0.3% against the Malaysian ringgit to 3.945, with Kenanga analysts forecasting consolidation between 3.93 and 3.96 next week.
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