Dollar Surges as Iran Tensions Fuel Bond Selloff and Yen Weakens Past 160

The dollar strengthened on Tuesday as renewed U.S.-Iran hostilities fueled inflation worries and sparked a global bond selloff, with the yen sliding past 160 per dollar for the third straight session. The jump in yields and comments from U.S. Treasury Secretary Scott Bessent failed to arrest the yen's decline, despite expectations that Japan's government and central bank would take action to strengthen the currency.

U.S. President Donald Trump threatened further strikes against Iran after the first exchange of direct attacks in a month, pushing Brent crude futures above $92 a barrel and fueling inflation worries. The 10-year Japanese government bond yield touched 3% for the first time in 30 years, while the yield on 10-year Treasury notes hit its highest since January 2025.

Markets remain unconvinced that verbal pressure alone will reverse the yen's weakness, leaving the currency vulnerable unless the Bank of Japan delivers a clearly more hawkish signal or authorities intervene directly. The dollar index was 0.2% higher at 99.637, while the euro slipped 0.2% to $1.1592.

Traders are pricing in a 66% chance of a Fed hike later this month, compared with roughly 40% a week earlier, following last week's hawkish remarks from Fed Chairman Kevin Warsh. The outlook for U.S. monetary policy remains uncertain, with it unclear how the central bank will respond to incoming economic data in the months ahead.