US Dollar Supported by Rising Yields and Oil-Driven Inflation Risks

I. Market Overview

As of July 24, the foreign exchange market continues to be driven by a clear theme: the U.S. dollar remains supported by rising U.S. Treasury yields, crude oil breaking above a key psychological level, and ongoing geopolitical tensions in the Middle East. Meanwhile, most non-U.S. currencies remain under pressure, with the Japanese yen continuing to be the most sensitive major currency.

Recent market developments show that the U.S. dollar has strengthened further as higher Treasury yields and geopolitical risks boosted demand for safe-haven assets, pushing the U.S. Dollar Index (DXY) close to a three-week high. At the same time, USD/JPY has climbed back near its highest level in almost 40 years.

Crude oil has surged back above USD 100 per barrel following attacks on oil tankers in the Red Sea and renewed concerns over Middle East supply disruptions. Markets fear that higher energy prices could reignite inflation, making it more difficult for the Federal Reserve to pivot toward monetary easing.

Yesterday's U.S. Initial Jobless Claims data reinforced short-term dollar strength. Initial claims fell to 187,000, below market expectations and marking one of the lowest readings in years, highlighting the continued resilience of the U.S. labor market.

This has reduced expectations for early Federal Reserve rate cuts and provided additional support for the U.S. dollar.

In Europe, the European Central Bank (ECB) kept interest rates unchanged yesterday. However, with oil prices returning to around USD 100 per barrel, markets continue to price in a 25-basis-point rate hike in September.

Although higher energy prices could increase inflationary pressure and encourage the ECB to remain hawkish, Europe's heavy dependence on imported energy also means higher oil prices could slow economic growth, limiting support for the euro.

Today's key market theme can therefore be summarized as follows:

• The U.S. dollar remains in a strong position, supported by strong employment, elevated oil prices, and higher Treasury yields.

• Non-U.S. currencies remain under pressure, while tonight's U.S. PMI and New Home Sales data will determine whether the dollar can extend its rally.

II. Major Currency OutlookU.S. Dollar (USD)

The U.S. dollar continues to trade from a position of relative strength.

Yesterday's stronger-than-expected Initial Jobless Claims data confirmed the resilience of the U.S. labor market. Meanwhile, oil prices have moved back above USD 100, and Treasury yields continue to rise, reinforcing the market's “Higher for Longer” interest-rate narrative.

The primary focus tonight will be the release of the S&P Global PMI.

If both manufacturing and services PMI exceed expectations, the dollar is likely to remain well supported. Conversely, weaker-than-expected data could trigger profit-taking after the recent rally.

Key U.S. Economic Data Today (Market Expectations)

IndicatorForecastPreviousJuly Manufacturing PMI54.553.9July Services PMI51.551.2July New Home Sales610,000580,000

Euro (EUR)

The euro remains pressured by broad U.S. dollar strength.

Although the ECB left interest rates unchanged yesterday, it did not completely rule out additional policy tightening.

Oil prices climbing back toward USD 100 have revived concerns over imported inflation within the Eurozone, theoretically increasing pressure on the ECB to maintain a hawkish stance.

However, Europe's high dependence on imported energy means that higher oil prices may also weigh on economic growth, making any interest-rate support for the euro relatively fragile.

Should today's Eurozone PMI disappoint, the euro's upside may remain limited.

British Pound (GBP)

Sterling continues to face headwinds from overall U.S. dollar strength.

Today's UK Retail Sales and PMI figures will be the key focus.

Market Expectations

IndicatorForecastManufacturing PMI52.0Services PMI50.0Composite PMI50.4

Stronger economic data could provide temporary support for the pound, although continued U.S. dollar strength may limit any rebound to a technical correction.

Japanese Yen (JPY)

The Japanese yen remains the most sensitive major currency in the current market environment.

USD/JPY continues to trade near its highest level in almost four decades, primarily due to:

• A widening U.S.–Japan interest rate differential

• Rising U.S. Treasury yields

• Higher global energy prices

Japan's latest government white paper highlighted increasing inflationary pressure, particularly as higher energy costs driven by Middle East tensions continue to pass through to businesses and households.

This supports the Bank of Japan's assessment that inflation is becoming more deeply embedded within the economy.

Nevertheless, as long as U.S. yields continue rising faster than Japanese yields, the yen is likely to remain under pressure.

Meanwhile, with USD/JPY approaching historic highs, the risk of direct intervention by Japanese authorities continues to increase.