Most major currencies were steady against the dollar on Friday, though the dollar index was on pace for its biggest weekly jump in about a month, driven in large part by growing expectations for the Federal Reserve to raise interest rates.
Markets show traders believe central banks are more likely to raise borrowing costs, with a one-in-three chance of a rate hike from the Fed as soon as next week — a sea change from merely a week ago — while a move in September is more than fully priced in.
The European Central Bank left rates unchanged on Thursday, but a September rate hike is about 70% priced in. Data on Friday offered a more optimistic economic outlook, after surveys of business activity showed Germany's private sector returned to growth in July for the first time in four months and contraction in France's private sector eased this month.
In bond markets, the benchmark 10-year U.S. yield hit a more than 18-month high of 4.713%, and last traded at 4.671%. The yield on 30-year bonds was steady at 5.151%, not far from a 19-year peak of 5.201%.
"As for the Fed, uncertainty around the outlook for both the policy rate and the balance sheet could weigh on the UST market over the next few months," John Davies, U.S. rates strategist at Standard Chartered Bank, wrote in a note on Friday.
"Our base case remains an on-hold Fed, but we see a risk that the long-end might start to question whether Chair Warsh is only ready to ‘talk the talk’ rather than ‘walk the walk’ on delivering price stability."
The yen was pinned near 40-year lows at 163.73 per dollar, drawing warnings from the U.S. Treasury about excess volatility in the currency and from Japan's finance minister.
Precious metals edged higher in choppy trading, with gold up 0.4% at $4,063 an ounce after falling 2% the day before, while silver advanced about 1.3% after a decline of 3.4% on Thursday.
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