US FX WRAP: Dollar gains every day so far this week on monster yield rally

USD finished higher against its peers for a fourth consecutive day this week, again supported by continued inflation concerns as US yields and oil prices marched higher. Reports of US-Iran progress continue to surface; however, tangible progress is yet to be observed. The latest indication came via an Iranian official speaking to Reuters, who said a phased deal could see Iran resume free navigation through the Strait of Hormuz in exchange for the US lifting its blockade and potentially unfreezing Iranian assets. That said, the official described US demands as excessive and the likelihood of a diplomatic resolution as “extremely low”. Also casting doubt over diplomacy is the ongoing conflict between the Houthis and Saudis, with the former saying it struck Saudi Aramco facilities in Yanbu and a “sensitive target” in Riyadh.

Outside of geopolitics, Fed's Paulson, a 2026 voter, did not share the same conviction as some of her peers who have explicitly called for another 2026 rate hike, saying instead that another hike may be required to curb inflation. She added, however, that the best that can be said about inflation is that it has not worsened. Meanwhile, the continued move higher in US yields reflects persistent concerns around the inflation outlook and whether or not the Fed are behind the curve, although Thursday's long-end weakness was also influenced by Treasury supply dynamics. The 7yr note auction was met with weak demand, producing its largest tail since March, while the Treasury's 20-30yr liquidity-support buyback accepted just USD 4.08bln against the USD 6bln maximum announced on Wednesday. DXY hit highs of 101.398.

In Europe, it was a day of central bank rate decisions. The SNB held rates at 0.00% as expected, although it adjusted its FX intervention language, saying it remains “willing to be active in the foreign exchange market”, versus its previous “increased willingness” to intervene. EUR/CHF rose to around 0.9422 from the 0.9386 open.

The Riksbank held rates as expected, accompanied by hawkish commentary and rate projections. Meanwhile, the Norges Bank hiked rates by 25bps, with expectations split between a hold and a hike. EUR/SEK and EUR/NOK both traded modestly higher.

MXN was hit by Dollar strength, while there was little reaction to Banxico unanimously leaving rates unchanged. However, the central bank adjusted its guidance, saying future decisions will consider the ongoing disinflation process and the expected behaviour of its determinants, including exchange-rate pass-through to consumer prices, slack conditions and inflation expectations. Previously, Banxico had said the Governing Board estimated it would be appropriate to maintain the reference rate at its current level.