The dollar was supported by rising US Treasury yields on Friday and hovered near a 40-year high against the yen, amid rising oil prices and a resurgence of global trade war, which heightened fears of 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 rallied, according to Reuters.

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

The dollar's latest rally came alongside Brent crude oil returning to trade above $100 per barrel.

US President Donald Trump also threatened Iran and its Houthi allies with "major military punishment."

In a development that heightened inflationary concerns, 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 macroeconomics 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 quantities, and then comes the price shock from trade tariffs."

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

The new disruptions in the Middle East and renewed trade tensions pushed US Treasury yields higher as inflation fears grew, with the benchmark 10-year yield rising to its highest in more than 18 months, exceeding 4.7%.

The 30-year Treasury yield steadied above 5%, while the 2-year yield hit its highest since February 2025 at 4.3627%.

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

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

The US Treasury warned on Thursday of excessive volatility in the yen 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 edged up 0.1% to $0.5778, after losses of 0.8% on Thursday.

Investors' attention now turns to a busy week of central bank decisions, led by the Federal Reserve, as policymakers face growing inflationary pressures amid the bank's scaling back of its forward guidance.

Leonard Kwan, fixed-income portfolio manager at T. Rowe Price, said: "Scaling back or eliminating forward guidance represents, from our perspective, an effective tightening of financial conditions without the need to raise interest rates."

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

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