The US dollar posted its largest weekly gain in more than two months during the week ending May 15, 2026, climbing over 1.35 percent against a basket of major currencies as surging Treasury yields and hotter-than-expected inflation data fuelled growing market expectations that the Federal Reserve may be forced to raise interest rates before year-end. The dollar index reached a one-month high of 99.28, driven by a combination of resilient economic data, an energy-led inflation spike linked to the ongoing Iran conflict, and the repricing of Fed policy expectations. The euro fell to a one-month low, sterling suffered its worst weekly decline since November 2024 amid a deepening political crisis in the UK, and the Japanese yen weakened past 158 per dollar despite rising domestic wholesale prices. A closely watched two-day summit between US President Donald Trump and Chinese leader Xi Jinping in Beijing concluded with limited concrete outcomes, doing little to shift currency markets.
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Key Overview
- Dollar index: Rose to 99.28, a one-month high; weekly gain of 1.35 percent, the largest since early March
- 10-year Treasury yield: Surged to 4.59 percent, the highest since February 2025
- 30-year Treasury yield: Hit 5.12 percent, the highest since May 2025
- April CPI: 3.8 percent year-on-year, the highest since May 2023; core CPI at 2.8 percent
- April PPI: 6.0 percent year-on-year, the hottest in nearly four years
- Fed rate hike probability: Over 65 percent chance of a hike by December, up from under 20 percent a week earlier
- Euro: Fell to a one-month low of $1.1617
- Sterling: Dropped to $1.3335, its weakest since April 8, amid UK political turmoil
- Yen: Weakened past 158 per dollar despite rising Japanese wholesale inflation
- Trump-Xi summit: Concluded with no major agreements; Strait of Hormuz and Taiwan dominated discussions
Treasury Yields Power the Greenback Higher
The US dollar’s rally gathered decisive momentum through the week of May 12–16 as Treasury yields surged to levels not seen in over a year, driven by an inflation picture that has become increasingly uncomfortable for the Federal Reserve.
The yield on the benchmark 10-year Treasury note climbed to 4.59 percent by the close of trading on Friday, its highest level since February 2025, while the 2-year note ended at 4.09 percent. The 30-year bond yield shot above 5.12 percent, nearing the highest since October 2023 and underscoring the market’s growing conviction that monetary policy will need to remain restrictive for longer than previously assumed.
The dollar index, which measures the greenback against a basket of six major currencies, rose to a one-month high of 99.28, taking its weekly gains to 1.35 percent — the sharpest advance since early March. Joseph Trevisani, senior analyst at FXStreet in New York, said the bond market was leading the charge on repricing inflation expectations. “If you’re going to get an oil price in WTI from 95 to 105, then a lot of inflation expectations have to be reset, and in fact, they’re resetting,” he observed.
ING FX strategist Francesco Pesole noted that the dollar was catching up with a run of strong data released throughout the week. “It feels like there’s a realisation that the U.S. story in an energy crisis may just end up being much better than many other places in the world,” he said.
Inflation Data Reshapes Fed Expectations
The week’s defining macro event was the release of data that confirmed US inflation is accelerating sharply, propelled by an energy shock that shows no signs of abating.
The Bureau of Labor Statistics reported on Tuesday that the consumer price index rose 3.8 percent year-on-year in April, up from 3.3 percent in March and above the consensus forecast of 3.7 percent. It was the highest annual reading since May 2023. On a monthly basis, the CPI increased 0.6 percent, driven overwhelmingly by energy prices, which jumped 3.8 percent for the month and 17.9 percent year-on-year — the steepest annual energy increase since September 2022. Gasoline prices alone surged 28.4 percent compared to a year earlier.
The core CPI, which strips out volatile food and energy, rose 0.4 percent monthly and 2.8 percent annually, both above expectations, suggesting that price pressures are broadening beyond the direct impact of oil. Morningstar analysts noted that rising oil prices are flowing through into non-energy goods for which oil is an input, with grocery prices jumping 0.7 percent in the month.
Adding to the hawkish narrative, the producer price index came in at 6 percent year-on-year, the hottest reading in nearly four years. Import prices rose 4.2 percent annually — the most since October 2022 — while export costs surged 8.8 percent, the highest since September of that year.
The cumulative effect on rate expectations was dramatic. According to the CME FedWatch tool, investors priced in a more than 65 percent probability that the Fed could raise rates by December, compared with less than 20 percent just a week earlier. Chris Zaccarelli, chief investment officer at Northlight Asset Management, said that given inflation was heading in the wrong direction while the labour market held up, it was very unlikely the Fed would lower rates any time soon and possible the market would start pricing in hikes for 2026.
Data on Thursday reinforced the picture of a resilient economy, with US retail sales increasing further in April and weekly initial jobless claims pointing to continued stability in the labour market.
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The Iran War’s Inflationary Shadow
The inflation surge is inextricable from the ongoing US-Iran conflict, which has disrupted energy markets since fighting began on February 28. Iran’s partial blockade of the Strait of Hormuz — through which roughly a fifth of global oil and liquefied natural gas supplies typically flow — has sent crude prices soaring, with West Texas Intermediate hitting $104.39 per barrel and Brent crude reaching $108.30 by Friday.
The national average gasoline price has climbed above $4.50 per gallon according to AAA, up nearly 50 percent since the war started, placing severe financial pressure on American households and creating a political headache for the administration. The energy shock has left the Fed in what analysts describe as an uncomfortable bind: its traditional tools of rate hikes cool demand but do nothing to increase global oil supply.
FXStreet’s weekly analysis noted that the combination of sticky inflation, resilient economic activity, elevated oil prices and renewed supply-chain disruptions had materially complicated the Fed’s path back toward easing. Several Fed officials, while not rushing toward an immediate hike, made clear during the week that keeping rates unchanged may not be sufficient if inflation continues drifting higher. Susan Collins, president of the Federal Reserve Bank of Boston, delivered one of the week’s clearest hawkish messages.
The inflation data takes on added significance as newly confirmed Fed Chair Kevin Warsh, who was approved by the Senate on Wednesday, begins navigating an increasingly complicated policy landscape. Warsh had previously advocated for lower rates — a position now difficult to reconcile with the burst of inflation since the Iran conflict began.
Euro, Yen, and Sterling Under Pressure
The dollar’s strength rippled across major currency pairs, leaving the euro, yen, and sterling all nursing significant losses for the week.
The euro fell to a one-month low of $1.1617 and was on track to lose 1.3 percent for the week as investors rotated toward the higher-yielding US currency. The eurozone’s own economic outlook, weighed down by the energy crisis and weaker manufacturing data, offered little counterbalance to the dollar’s momentum.
The Japanese yen weakened past 158 per dollar despite domestic data that might ordinarily have supported the currency. Japan’s wholesale inflation accelerated in April at the fastest pace in three years as the Iran war boosted oil and chemical goods prices, bolstering the case for the Bank of Japan to raise interest rates as soon as June. The yen was last 0.1 percent lower at 158.47 per dollar, caught between domestic hawkish signals and the overwhelming pull of rising US yields.
Sterling suffered the sharpest political blow of the week. The pound dropped to $1.3335, its lowest since April 8, and was on course for its biggest weekly decline since November 2024 as Prime Minister Keir Starmer faced an intensifying leadership crisis following Labour’s devastating performance in local elections held on May 7. Labour lost over 1,300 council seats to Reform UK, the Greens, the SNP, and Plaid Cymru in what was described as a historic shellacking.
The political turmoil escalated further on Thursday when Health Secretary Wes Streeting resigned, intensifying pressure on Starmer and triggering open discussion within the party about succession. Markets grew concerned that a potential new leader — with Greater Manchester Mayor Andy Burnham and former deputy PM Angela Rayner cited as frontrunners — might favour looser fiscal policy, a prospect that would unsettle bond markets already nervous about UK public finances. UK 10-year gilt yields fell over four basis points to around 5.03 percent as investors weighed the political uncertainty.
Trump-Xi Summit: Big on Symbolism, Short on Substance
Currency markets largely shrugged off the conclusion of a closely watched two-day summit between President Trump and President Xi in Beijing, which ended Friday without any major concrete agreements.
The Iran war dominated the agenda. Trump said after the meetings that Xi had offered to help negotiate an end to the conflict and reopen the Strait of Hormuz. Both leaders agreed that Iran must never possess nuclear weapons and that the strait must remain open to support free flow of global energy. China’s heavy reliance on Iranian oil could theoretically give Beijing leverage over Tehran, though analysts at Al Jazeera noted that any Chinese pressure on Iran would likely come with demands for US concessions on Taiwan.
Xi reserved his sharpest language for Taiwan, calling it the most important issue in the bilateral relationship and warning that mishandling it could push the two countries toward collision or conflict. Trump, asked whether the US would defend Taiwan, declined to answer directly.
Yue Su, principal economist for China at the Economist Intelligence Unit, noted that while Iran appeared to have become an important topic at the summit, there were limits to what China could realistically achieve. “The Iranian regime is operating in survival mode and will prioritise its own interests and agenda above all else,” she said.
The onshore yuan retreated from its highest level against the dollar in more than three years due to broad greenback strength, trading at 6.8038 per dollar. Its offshore counterpart dipped 0.3 percent to 6.8066. Energy prices jumped again after the summit concluded with little to show in terms of immediate relief for oil markets, with WTI crude rising to $104.39 per barrel.
What Comes Next
The week’s price action leaves the dollar in its strongest position in months, but the sustainability of the rally hinges on several unresolved questions.
The most immediate is whether the Fed will validate the market’s hawkish repricing. Erik Nelson, head of G10 FX strategy at Wells Fargo, cautioned that the recent dollar strength could fizzle out if the Fed fails to confirm rate hike expectations, noting that holding rates unchanged was itself viewed as tightening by most FOMC members.
The trajectory of oil prices remains the single most important variable. If diplomatic progress on the Strait of Hormuz materialises — whether through the Trump-Xi channel or separate US-Iran negotiations — energy prices could retrace and take some of the heat out of inflation readings. But with the conflict now in its third month and no comprehensive agreement in sight, the base case remains one of elevated energy costs for the foreseeable future.
The May CPI release, scheduled for June 10, will be the most critical data point for determining whether April’s core acceleration was a one-month aberration or the beginning of a sustained trend. For now, the bond market has rendered its verdict: inflation is a problem, yields are repricing accordingly, and the dollar stands as the clearest beneficiary.
Sources: CNBC / FXStreet / Reuters / Advisor Perspectives / Bloomberg / Morningstar / EY / Trading Economics / Fox Business / CNN / Time / Euronews / Al Jazeera / Global Banking and Finance / Investing.com / Pound Sterling Live / IBTimes UK / Wichita Liberty
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