Dollar rides high on Fed rate-hike bets

A surging dollar has swept past chart resistance and is heading toward its sharpest monthly gain in almost a year on Thursday, as traders bet on a strong U.S. economy propping up short-term interest rates and waited on key inflation data.

The dollar has broken the $1.14 level against the euro this week and hit its strongest in 13 months at $1.1325 overnight, before steadying in Asia at around $1.1353.

At 161.73 yen, it is within a whisker of its highest in just over four decades on the struggling Japanese currency.

Dollar strength has pushed gold below $4,000 an ounce for the first time in more than seven months and briefly sent bitcoin under $60,000 for the first time since 2024.

The dollar index, which measures the currency against a basket of six major peers, made a 13-month peak at 101.8 overnight and started the Asia session steady around 101.6.

The Iran war and jump in oil prices reversed market expectations for U.S. rate cuts this year and a surprisingly hawkish-sounding debut from Kevin Warsh as Federal Reserve chair last week has traders pricing a U.S. hike as soon as October.

Since the start of May, 2-year U.S. Treasury yields, which track short-term rates expectations, are up 27 basis points to 4.15% against a 7 bp fall in Europe’s benchmark German 2-year yields to 2.56%.

At the 10-year tenor the gap in favor of U.S. yields widened 20 bps in the same period to top 150 bps.

“We believe the move in rates and the dollar reflects expectations of cyclical and structural U.S. economic outperformance,” said Steve Englander, head of global G10 currency research at Standard Chartered in New York.

“Strong productivity growth, partly AI-driven, should support higher earnings and lead to dollar-positive capital inflows,” he said.

The dollar made a seven-month high on sterling overnight at $1.314 and an 11-month top of 0.8139 Swiss francs.

Shaky equity markets have made for added punishment for the risk-sensitive Antipodeans and there was little respite for the Aussie and kiwi on Thursday, despite steadier stocks.

The Aussie, down more than 1.8% for the week so far, was under pressure at $0.6890 ahead of May jobs data, where some reversal of April’s weakness is expected.

The New Zealand dollar, down 1.7% this week, sat at $0.5640, just above Wednesday’s seven-month trough of $0.5631.

Later on Thursday, the Fed’s preferred inflation yardstick, core personal consumption expenditures, is due for May. A rise is expected though the outlook, since oil prices have tumbled back to pre-war levels, is for inflation to cool and overnight long-dated U.S. Treasuries rallied sharply, lowering yields.

“Further USD gains will require further (widening) in rate differentials, but in the short term the corporates need dollars and will keep needing dollars for a few more days,” said Brent Donnelly, president at analytics firm Spectra Markets.

“My view is that this is creating a USD-positive feedback loop where (speculators) are adding and technicals are breaking, and that feedback loop will probably burn itself out soon.”