As the market falls into a "bubble" debate, the US dollar quietly rises to a three-month high.

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As global markets become volatile due to unclear tech stock earnings and central bank policy signals, the US dollar is quietly strengthening.

The US dollar index—which measures the dollar against a basket of six major currencies—held steady at 99.5 on Friday. The previous day, a decline in US stocks triggered risk-off sentiment in global markets, pushing the index to a three-month high. Rodrigo Catril, currency strategist at National Australia Bank, said, “Risk aversion is favorable for the dollar.”

Meanwhile, the yen has stabilized after hitting a near nine-month low. Earlier, Japan's new Finance Minister Satsuki Katayama stated that the government is monitoring forex movements with a “high sense of urgency,” giving the continuously weakening yen some breathing room. However, the yen has fallen 4% against the dollar over the past month, marking its worst monthly performance since July.

Behind these developments is a market reassessment of the Federal Reserve’s future interest rate path. Traders have scaled back bets on another Fed rate cut in December, thereby boosting the appeal of dollar assets. The complex macro outlook is directing funds towards the perceived safety of the US dollar.

Yen Under Pressure: Tug-of-War Between Inflation Data and Official Statements

The yen is currently caught between expectations of official intervention and ongoing loose policy. Japanese Finance Minister Satsuki Katayama’s verbal warnings helped the yen rebound 0.1% against the dollar on Friday, to 154.01 yen. Katayama also said she would not stick to her March comments about the yen’s “true value” being close to 120-130, citing her current position’s responsibility for monetary policy.

However, fundamental factors continue to pressure the yen. Data released Friday showed Tokyo’s core consumer price index (CPI) rose 2.8% year-on-year in October, exceeding market expectations and indicating persistent inflation above the Bank of Japan’s target. This “hot” data further complicates the situation for the Bank of Japan, which just decided to keep rates unchanged on Thursday.

Singapore Bank currency strategist Sim Moh Siong said, “We’re entering a point where yen weakness is becoming a political concern.” In addition to its weakness against the dollar, the yen is also near historic lows versus the euro.

Cooling Fed Rate Cut Expectations, Rising US Bond Yields

The main driver behind the dollar’s strength is a shift in market expectations for the Fed’s policies. According to CME Group’s FedWatch tool, futures market data shows that the probability of a 25 basis point Fed rate cut at the December 10 policy meeting has fallen from 91.1% a week ago to 74.7%.

Rodrigo Catril of National Australia Bank pointed out:

“The Fed is uncertain about whether it will cut rates again, while the Bank of Japan’s actions offer no help for the weak yen.”

This shift in market expectations is directly reflected in the bond market. The yield on the US 10-year Treasury note rose to about 4.1%, the highest in three weeks, up 0.7 basis points from the previous close—enhancing the relative appeal of dollar assets.

Divergence Among Major Currencies, Euro Holds Firm

Against a generally stronger dollar, other major currencies performed unevenly.

The euro rose to $1.156 against the dollar. Previously, the European Central Bank kept interest rates unchanged at 2% for the third consecutive meeting on Thursday and reiterated that with economic risks subsiding, its policy was in a “good position.”

The pound was steady at $1.31555, as markets focused on the political pressure facing UK Chancellor Rachel Reeves. Meanwhile, commodity currencies such as the Australian and New Zealand dollars were weak: the Australian dollar fell 0.1% to $0.65495, and the New Zealand dollar dropped 0.2% to $0.57325, reflecting global risk-off sentiment.

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