FOREX-Dollar climbs for fifth straight day as Treasury yields surge

* Inflationary pressures fuel rate-hike expectations

* Rising US Treasury yields and inflation fears drive dollar strength

* Fed's Williams does not see need to change rate policy (Updates to afternoon US trading)

By Chuck Mikolajczak

NEW YORK, May 15 (Reuters) - The dollar strengthened for a fifth straight day on Friday and was set for its largest weekly percentage rise in two months, as market expectations for the Federal Reserve's monetary policy path tilt further toward possible rate hikes. The dollar's advance comes as U.S. Treasury yields continue to ascend, with the benchmark 10-year Treasury note reaching 4.599%, its highest in a year. A raft of economic data earlier this week pointed to rising price pressuresas energy supplies through the Strait of Hormuz remain largely blocked due to the Iran war.

The dollar index, which measures the greenback against a basket of currencies, gained 0.32% to 99.27 after climbing to 99.302, with the euro down 0.39% at $1.1623 after hitting a five-week low of 1.1617.

"It's looking to me that the bond market's leading the charge on this one, as they often do, that they're starting to get worried about inflation," said Joseph Trevisani, senior analyst at FXStreet in New York.

"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. Well, if they're resetting, the bond market's going to do exactly the same thing, and that's what the bond market is doing." West Texas Intermediate crude jumped 4.16% to $105.38 a barrel and Brent rose to $109.34 per barrel, up 3.42% on the day, after comments by U.S. President Donald Trump and Iran's foreign minister further dented hopes of a deal to end ship attacks and seizures around the Strait of Hormuz.

FED OFFICIALS SIGNAL INFLATION FOCUS

The five-day streak of gains for the dollar would mark its longest since late March, with the index up roughly 1.5% for the week. The euro was off about 1.4% on the week, its biggest drop in two months. Several Fed officials this week indicated that keeping inflation pressures in check was a top priority, while others did not rule out the possibility that rate hikes may be needed if price pressures continued to mount. Federal Reserve Bank of New York President John Williams said late on Thursday he did not see a need right now for the central bank to weigh any change in interest rate policy amid the uncertainty created by the Middle East war, as monetary policy was in a "good place."

Erik Nelson, head of G10 FX strategy at Wells Fargo, said in a note that he expected the recent dollar strength would "fizzle out and return to USD weakness as the Fed fails to validate rate-hike pricing," as holding rates unchanged was viewed as tightening for most Federal Open Market Committee members. Markets are now pricing in a 49.5% chance the Fed could hike rates by at least 25 basis points at its December meeting, compared with 14.3% a week ago, according to CME FedWatch.

The yield on benchmark U.S. 10-year notes was last up 13.6 basis points at 4.595%, on pace for its biggest daily jump since April 9, 2025. The 30-year bond yield jumped 11.4 basis points to 5.1272% after hitting 5.131%, its highest since May 22.

"The bond market now is finally like, maybe this quick resolution and snap back in energy prices isn't going to happen and we've got to price in longer-term inflation expectations," said Mike Sanders, head of fixed income at Madison Investments in Madison, Wisconsin. Against the Japanese yen, the dollar strengthened 0.25% to 158.74. Japan's wholesale inflation accelerated in April at the fastest pace in three years as the Iran war boosted oil and chemical goods prices, data showed on Friday, bolstering the case for the central bank to raise interest rates as soon as June.

The yen has weakened more than 1% on the week, pushing it back towards the 160 mark that recently prompted intervention in the currency by Japanese officials. Sterling weakened 0.57% to $1.3323 after hitting a five-week low of $1.3313, with Prime Minister Keir Starmer facing political turmoil as he seeks to hold on to power. The pound was off more than 2% on the week, putting it on track for its biggest weekly drop since November 2024.

(Reporting by Chuck Mikolajczak; additional reporting by Karen Brettell in New York, Samuel Indyk in London and Rae Wee in Singapore; Editing by Kate Mayberry, Jamie Freed, Ros Russell, Andrew Heavens, Alex Richardson and Edmund Klamann)