The U.S. dollar remained firm on Thursday, supported by rising Treasury yields as investors began pricing in expectations for a Federal Reserve rate hike this year. The onshore Chinese yuan traded near a three-year high; the offshore yuan strengthened against the dollar for an eighth consecutive session to 6.7845. On Thursday, the dollar held steady, with the euro changing slightly to 1.1717 against the dollar. The euro is on track for a 0.6% weekly decline, its largest in two months. The U.S. Dollar Index, which measures the currency against a basket of peers, was last at 98.48, having gained over 0.6% so far this week, marking its best weekly performance since the outbreak of the Iran war. The dollar gave up early gains against the yen, edging lower to 157.87. The yen found support after Bank of Japan board member Kazuo Ueda stated that the central bank should raise rates swiftly if there are no clear signs of an economic slowdown. Over the past two weeks, Japanese authorities are believed to have intervened multiple times in the market to curb the dollar's strength. However, with traders now pricing in Fed rate hike expectations for this year, the yen is under pressure. The dollar has recovered 50% of its losses since the authorities' last intervention to support the yen. Persistent Inflationary Pressures The dollar's sustained strength this week stems from evidence of rising inflation in the United States. Latest data on Wednesday showed the U.S. Producer Price Index (PPI) for April recorded its largest increase in four years; data on Tuesday showed consumer inflation (CPI) growing at its fastest pace in three years. Carol Kong, a foreign exchange strategist at Commonwealth Bank of Australia, said, "This week's inflation data certainly won't be welcomed by Federal Open Market Committee (FOMC) officials, including incoming Fed Chair Kevin Warsh." The U.S. Senate approved Warsh as the new Federal Reserve Chair on Wednesday, with the 56-year-old lawyer and financier officially taking the helm of the U.S. central bank. Kong added, "We forecast the FOMC will begin its rate hike cycle in December this year and currently expect three rate hikes in this cycle."
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