By Rae Wee
SINGAPORE, May 15 (Reuters) – The dollar rode U.S. Treasury yields higher on Friday and was set for its biggest weekly gain in more than two months, as mounting inflationary pressures from higher energy prices fuelled bets of a Federal Reserve rate hike this year.
Markets were also keeping a close eye on the second day of a summit between U.S. President Donald Trump and his Chinese counterpart Xi Jinping, with Trump seeking economic wins from Beijing against the backdrop of the Middle East war.
Trump said his patience with Iran was running out, and that he and Xi do not want Iran to have nuclear weapons and “want the straits open”.
Market reaction to the talks has so far been muted as investors await more details. The onshore yuan
“The meeting is broadly in line with market expectations and slightly constructive at the margin,” said Cliff Zhao, chief economist at CCB International.
“A better tone is helpful, but markets will still look for more clarity on trade, business access and specific policy arrangements.”
In the broader market, the dollar rose as U.S. Treasury yields scaled 11-month highs on growing bets of a Fed hike this year.
Against the greenback, the euro fell to a one-month low and last traded 0.15% lower at $1.1651. The common currency was set to lose about 1.1% for the week.
The yen struggled on the weaker side of 158 per dollar despite domestic data pointing to a spike in wholesale inflation, bolstering the case for the Bank of Japan to raise interest rates as soon as June.
The dollar index meanwhile rose to a one-month top and was on track for a weekly gain of roughly 1.2%, capping off its sharpest increase since early March.
BETTING ON FED HIKES
The dollar rally has been gathering pace all week, on evidence that while domestic inflation is mounting the U.S. economy remains resilient despite the ongoing Middle East conflict.
Data on Thursday showed U.S. retail sales increased further in April while weekly initial jobless claims figures pointed to stability in the labour market.
Investors are now pricing in just under a 40% chance that the Fed could raise rates in December, compared with a 22.5% chance a week ago, according to the CME FedWatch tool.
“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,” said Alvin Liew, senior economist at UOB.
“We now expect an extended period of pause to cover the remainder of 2026 before the Fed resumes easing in 2027.”
In other currencies, sterling fell to a one-month low of $1.3364, having slid 0.9% in the previous session following the resignation of British health minister Wes Streeting, deepening the political crisis there.
“The prospect of a potentially disruptive leadership transition and yet another challenging fiscal backdrop heading into the autumn is likely to weigh on sentiment,” said Henry Cook, senior Europe economist at MUFG Bank.
“We see the balance of risks to the UK outlook as firmly skewed to the downside.”
The Australian dollar edged away from its recent four-year peak on the greenback’s strength and traded 0.4% lower at $0.7190.
The New Zealand dollar fell 0.55% to $0.5879.
(Reporting by Rae Wee and Jiaxing Li; Editing by Shri Navaratnam and Kate Mayberry)
Comments