Dollar Rises on Inflation Report, Yen Sees Two-Week Win Streak

The US dollar index ticked up slightly on Friday due to a consumer inflation report that boosted Federal Reserve rate hike expectations. The dollar rose by 0.1% to 99.13, according to the dollar index, which tracks the greenback against six major peers.

Federal Open Market Committee (FOMC) participants are now more likely to deliver a quarter-point rate hike next week after the August consumer price index (CPI) report exceeded expectations. The probability of a 25-basis point increase surged to nearly 87% from about 69% before, according to the CME FedWatch tool.

The US Treasury bond market has reflected the steady rise in hawkish expectations, undergoing a rout since roughly the July rate decision. However, the subsequent surge in yields took the 10-year Treasury yield to a nearly two-decade high and sparked a move by the Treasury Department to increase buyback sizes of longer-term instruments.

The Japanese yen has remained the major FX market story since last week, strengthening against the dollar on Friday and set for its first two-week positive run against the greenback since early May. The yen's monster rally reflects accelerating conviction that Bank of Japan (BoJ) Governor Kazuo Ueda and the Governing Council will raise borrowing costs on September 18.