Dollar rises on rate-hike expectations as yen weakens again

The US dollar rose on Tuesday as a global bond selloff intensified and inflation concerns resurfaced following renewed attacks in the Gulf region, while the yen weakened back beyond 160 per dollar despite growing pressure on the Bank of Japan to raise interest rates.

In currency trading, the dollar index, which measures the US currency against six major peers, rose 0.2% to 99.623.

The euro fell 0.2% to $1.1589 ahead of the eurozone inflation report, after gaining more than 1% in August.

The British pound traded at $1.3532 after rising 0.5% last month.

US President Donald Trump threatened further strikes against Iran following the first direct exchange of attacks between the two countries in a month, pushing Brent crude futures above $91 a barrel, fueling inflation concerns and triggering a selloff in bond markets.

The 10-year US Treasury yield climbed to its highest level since January 2025, while the yield on 10-year Japanese government bonds touched 3% for the first time in 30 years.

US Treasury Secretary Scott Bessent said he believes the Japanese government and the Bank of Japan will take measures that lead to an appreciation of the yen.

While markets had already widely expected the Bank of Japan to raise interest rates in September, Bessent’s comments reinforced expectations that the central bank would proceed with a hike and increased pressure on policymakers to accelerate the pace of further increases.

However, neither the jump in bond yields nor Bessent’s remarks were enough to halt the yen’s decline.

The Japanese currency traded at 159.99 per dollar after weakening beyond the 160 level for a third consecutive session, a threshold widely seen as increasing the risk of intervention by Japanese authorities to support the currency.

A rare joint intervention by the United States and Japan in late July provided temporary support for the struggling yen, pulling it away from a 40-year low of 163.99 per dollar. The currency has since surrendered most of the gains it made following the coordinated intervention.

Japanese Finance Minister Satsuki Katayama said she had met with Bessent and that the two sides agreed orderly movements in the yen were critically important to global market stability.

Beyond the yen, the dollar remained broadly supported as traders increased bets on a Federal Reserve interest rate hike in September following hawkish remarks from Fed Chair Kevin Warsh last week.

Warsh strengthens rate-hike bets

In his first speech at the Jackson Hole symposium for central bankers, Warsh said the Federal Reserve would “have work to do” if inflation did not appear to be on a downward trajectory.

Nevertheless, many Wall Street traders remained uncertain about how the US central bank would respond to changes in economic conditions over the coming months.

Markets are currently pricing in a 65% probability that the Federal Reserve will raise interest rates later this month, up from around 41% a week ago, according to CME’s FedWatch Tool.

A series of US economic reports due this week, culminating in Friday’s nonfarm payrolls report, is expected to help shape market expectations for the Federal Reserve’s monetary policy outlook.