The U.S. dollar strengthened further on Friday as U.S. Treasury yields increased in anticipation of a potentially significant increase in interest rates from the Federal Reserve the following week.
At the same time, the Chinese yuan fell below the psychologically significant threshold of 7 per dollar.
As investors seek the relative security offered by the greenback, the value of the dollar, when measured against a selection of other currencies, is on track for a gain of almost one percent this week.
As the dollar continues its steady ascent, the value of the yuan has become the most recent currency to fall to a level not seen in several years.
The lowest point reached by the euro during the day was $0.9945, a drop of up to 0.5%, while the pound sank to a fresh 37-year low of $1.1351, a drop of 1%. By 10:50 GMT, both had made gains, but overall they were still lower.
The dollar index increased by 0.5%, reaching 110.26, which is not too far off from its all-time high of 110.79, which was hit earlier this month.
According to Derek Halpenny, head of research for global markets at MUFG, "With the Federal Reserve expected to hike interest rates by possibly another 175 basis points before the end of the year, we would expect financial conditions to remain unfavorable for assets generally, and it clearly points to the United States dollar being the primary beneficiary."
Overnight, the soaring value of the US dollar drove the value of the offshore yuan above the important threshold of 7 per dollar for the first time in more than two years. The yuan reached a trough of 7.0424 against the US dollar.
In a similar fashion, the onshore unit smashed through the crucial level not long after the markets opened on Friday.
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The data showed that China's economy remained remarkably resilient in the month of August, with factory output and retail sales both growing at a faster rate than was anticipated. However, a worsening real estate market weighed heavily on projections.
"Growth and policy divergence between the US and China could continue to support the USDCNH in the next few months, even if some pullback is seen intermittently," said analysts at Maybank, who noted some "upside surprises" in the Chinese data release.
"Even if some pullback is seen intermittently, the USDCNH could continue to be supported by growth and policy divergence between the US and China in the next few months."
Traders will now move their focus to a series of monetary policy meetings next week that will be held by the Federal Reserve, the Bank of Japan (BOJ), and the Bank of England, with the Federal Reserve taking center stage in all of these sessions.
Yields on U.S. Treasuries increased after reports indicated that retail sales in the United States unexpectedly increased in the month of August. At the same time, a separate report from the Labor Department indicated that initial claims for state unemployment benefits decreased by 5,000.
Fed funds futures indicate a 75% possibility of a rate hike of 75 basis points at the meeting scheduled for the next week and a 25% chance of a rate hike of 100 basis points.
The already weakened Japanese yen, which has been a victim of the strengthening of the US dollar and widening interest rate differentials, could be in for much more trouble as a result of this development.
However, three people who are acquainted with the Bank of Japan's thinking stated that the central bank has no intention of boosting interest rates or making any changes to its dovish policy direction in order to support the yen.
At 143.16, the dollar was trading 0.2% lower against the yen, but it continued to be on track for a weekly gain for the sixth week in a row.
