The dollar was supported by rising US Treasury yields on Friday, hovering near a 40-year high against the yen, amid higher oil prices and a renewed global trade war, which heightened concerns over a return of inflationary pressures.

Sterling fell to near a three-week low, trading at $1.3310 in Asian hours, after dropping about 0.5% in the previous session as the dollar rebounded, according to Reuters.

The euro also came under pressure, steadying at $1.1381, despite expectations that the European Central Bank will soon raise interest rates, while the dollar index held near a three-week high of 101.41.

The latest dollar rally came as Brent crude returned to trade above $100 a barrel.

US President Donald Trump also threatened Iran and its Houthi allies with 'great military punishment'.

In a development that added to inflationary fears, the Trump administration announced new tariffs of 10% and 12.5% on imports from 60 trading partners, citing non-compliance with forced labor bans, coinciding with the expiration of temporary global tariffs of 10%.

Vishnu Varathan, head of Asia-Pacific economic and strategy at Mizuho Bank, said: 'The world should brace for a double whammy from tariffs, because oil itself is a commodity affected by tariffs. In addition to independent supply disruptions, there is a shock related to actual volumes, and then comes the price shock from trade tariffs.'

He added: 'I think markets tend to anticipate Trump's tariff approach, which is escalation first and then openness to negotiation. Regarding Iran and the Houthis, there seems to be no room for retreat after the decision to escalate.'

Fresh turmoil in the Middle East and renewed trade tensions pushed US Treasury yields higher amid growing inflation fears, with the benchmark 10-year yield hitting its highest in over 18 months, above 4.7%.

The 30-year Treasury yield steadied above 5%, while the two-year yield reached its highest since February 2025 at 4.3627%.

Varathan said: 'I think the 30-year yield reaching 6% is a matter of time, and the 10-year yield hitting 5% may be closer to a realistic expectation than just a concern.'

In currency markets, the dollar's rise added pressure on the yen, which steadied near a 40-year low of 163.80 per dollar.

The US Treasury warned on Thursday of excessive yen volatility and called on the Bank of Japan to continue raising interest rates.

Among other currencies, the Australian dollar rose 0.14% to $0.6978, after falling more than 0.4% in the previous session, while the New Zealand dollar gained 0.1% to $0.5778, following losses of 0.8% on Thursday.

Investor attention now turns to a week packed with central bank decisions, led by the Federal Reserve, as policymakers face rising inflationary pressures alongside the Fed's scaling back of forward guidance.

Leonard Kwan, fixed-income portfolio manager at T. Rowe Price, said: 'Scaling back or eliminating forward guidance represents, in our view, an effective tightening of financial conditions without needing to raise interest rates.'

He added: 'This approach adds greater uncertainty, giving the Fed more flexibility to choose the path it deems appropriate, which for investors means greater potential for market volatility with every central bank decision.'