Dollar Gains Strength on Rising Yields and Geopolitical Tensions

The US dollar has been gaining strength due to rising bond yields, geopolitical tensions, and higher energy prices. MUFG's Derek Halpenny notes that expectations of a possible Federal Reserve rate hike are encouraging further dollar buying.

Rising bond yields in the US have been significant, with OIS market indicating a 35% probability of a rate hike next week. Japan's bond yields have also increased, despite core-core nationwide CPI annual increase being slightly weaker than expected at 1.7% in June. However, the underlying adjusted measure stands at 2.7% in May.

The US Treasury semi-annual report did not cite any country for currency manipulation but referenced the undervaluation of the yen, stating that 'monetary policy normalisation would help anchor inflation expectations and reduce excessive rate volatility'. The US wants the Bank of Japan to hike interest rates, which may lead to a continued slow grind higher in USD/JPY due to global rates backdrop.