Dollar gains as Iran tensions fuel bond selloff; yen weakens past 160 again

By Medha Singh and Ankur Banerjee

Sept 1 (Reuters) - The dollar strengthened on Tuesday as renewed U.S.-Iran hostilities fuelled inflation worries and sparked a global bond selloff, while the yen slid past 160 per dollar again despite mounting pressure on the Bank of Japan to raise rates.

U.S. President Donald Trump threatened further strikes against Iran after the first exchange of direct attacks in a month, pushing Brent crude futures above $92 a barrel, fuelling inflation worries and spurring a bond selloff. [O/R]

The 10-year Japanese government bond yield touched 3% for the first time in 30 years, while the yield on 10-year Treasury notes hit its highest since January 2025. [US/] [JP/]

U.S. Treasury Secretary Scott Bessent said he believed Japan's government and central bank would take action that leads to a stronger yen. While the BOJ was already widely expected to lift rates in September, Bessent's comments could effectively lock the bank into doing so and put pressure on it to step up hikes.

Yet neither the jump in yields nor Bessent's comments were enough to arrest the yen's decline. The currency traded at 160.150 per dollar, breaching 160 for the third straight session, a level widely viewed as increasing the risk of intervention by Japanese authorities.

"Investors remain focused on Japan’s still-unfavorable rate differential with the United States and doubts over how aggressively the Bank of Japan will tighten policy," said Joel Kruger, market strategist at LMAX Group in London.

"Markets appear unconvinced that verbal pressure alone will reverse the yen's weakness, leaving the currency vulnerable unless the BoJ delivers a clearly more hawkish signal or authorities intervene directly."

A rare joint intervention from the U.S. and Japan at the end of July provided short-lived relief for the fragile yen, yanking it away from the 40-year lows of 163.99, but the currency has since surrendered most of the gains from the joint action.

Japanese Finance Minister Satsuki Katayama said the government will continue close dialogue with markets when asked by reporters about the rise in bond yields.

Beyond the yen, the dollar remained broadly supported as traders raised bets on a hike from the Federal Reserve in September after last week's hawkish remarks from Fed Chairman Kevin Warsh.

The euro slipped 0.2% to $1.1592. Euro zone inflation climbed back above 3% in August on higher energy costs, bolstering an already strong case for another European Central Bank rate hike this month.

Sterling dipped 0.1% to $1.3532. The dollar index, which measures the U.S. currency against six other units, was 0.2% higher at 99.637.

WARSH STOKES HIKE BETS

In his debut speech at the Jackson Hole symposium, Warsh said the Fed would "have work to do" if inflation failed to cool, his strongest hint yet that further rate hikes could be needed to contain price pressures.

Still, analysts said the outlook for U.S. monetary policy remained uncertain, with it unclear how the central bank would respond to incoming economic data in the months ahead.

Traders are pricing in a 66% chance of a Fed hike later this month, compared with roughly 40% a week earlier, the CME FedWatch tool showed.

"He wants to stamp the view that the Fed will deliver on its inflation mandate. However, in our view, it does not necessarily translate into a hiking cycle. Fed is going to be data dependent, and we expect the coming months inflation prints to remain benign," Jefferies chief European economist Mohit Kumar said in a note.

A batch of U.S. economic data this week, culminating in Friday's nonfarm payrolls report, could further shape expectations for the Fed's policy path.

In other currencies, the Australian dollar was at $0.7152, while the New Zealand dollar fetched $0.5900 after both currencies hit multi-month highs.[AUD/]

(Reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong, Ros Russell and Hugh Lawson)