Dollar Gains on Inflation Fears as Middle East Tensions, Trade Wars Escalate

The dollar surged on Friday, nearing a 40-year peak against the yen, as higher U.S. Treasury yields and escalating global inflation fears bolstered its appeal. Brent crude oil prices climbed back above $100 a barrel after Yemen's Houthis attacked two Saudi oil tankers in the Red Sea, a critical shipping route. This incident prompted U.S. President Donald Trump to promise "major military punishment" for Iran and its Houthi allies.

“

The world must be prepared for a double whammy of tariffs, because essentially oil is a tariff... and the independent supply disruptions... there is a certain actual quantity-determined disruption... then there's a price shock from the (trade) tariffs as well.

Adding to inflationary pressures, the Trump administration announced new tariffs of 10% and 12.5% on goods from 60 trading partners. These tariffs are imposed over allegations of lax enforcement of forced labor bans, coinciding with the expiration of a temporary 10% global tariff. Vishnu Varathan, Mizuho's head of macro strategy for Asia-Pacific, noted that the world faces a "double whammy" of tariffs, with oil prices acting as a tariff and trade tariffs further disrupting supply and increasing prices.

Geopolitical turmoil in the Middle East and renewed trade tensions sent U.S. Treasury yields higher. The benchmark 10-year yield rose to an 18-month high above 4.7%, while the 30-year yield remained above 5%. Two-year yields hit their highest since February 2025. Varathan suggested that 30-year yields could reach 6% and 10-year yields might hit 5%.

“

I think the world pretty much is more comfortable guessing Trump's style with tariffs, which is to say, big on upfront escalation and open to beg and negotiation. Whereas with Iran and the Houthis, you can't undrop a bomb, can you?

The dollar's strength continued to pressure the yen, which hovered near a 40-year low at 163.80 per dollar. The U.S. Treasury Department had previously warned against excessive yen volatility and called for further interest rate hikes by the Bank of Japan. Meanwhile, the Australian dollar rose 0.14% to $0.6978, and the New Zealand dollar edged 0.1% higher to $0.5778, after earlier declines.

“

I'm sure the question about whether 30-year yields will hit 6% is not far away, and your 10-year yield at 5% may be now more a bet than a fear.