The dollar hit a 13-month high against the euro on Wednesday, leaving the single European currency below $1.14. It also sent the pound to seven-month lows and kept the Japanese yen around its weakest in 40 years, around 161.9.
Dollar strength has pushed gold briefly below $4,000 an ounce for the first time in more than seven months and sent bitcoin under $60,000 for the first time since 2024.
The dollar index, which measures the U.S. currency against a basket of six others, was around 101.5 on Thursday, after touching a 13-month peak of 101.8 the previous day.
Traders who before the U.S.-Israeli war on Iran had expected the Fed to cut rates this year, now see one hike as soon as October and a 50/50 chance of a second by year-end.
This month alone, 2-year U.S. Treasuries, which track short-term rate expectations, have risen 14 basis points to 4.16%, compared with just a 2-bp rise in benchmark German 2-year yields to 2.56% and a near-9 bp fall in UK gilt yields.
MUFG currency strategist Lee Hardman said the rates market was clearly reflecting investors’ belief that the Fed will “back up tough talk on inflation by hiking rates this year”.He added, “If the Fed is serious about restoring price stability, a significant tightening of monetary policy will be required so it makes sense that more hikes have been priced in, recently encouraging a stronger U.S. dollar.”
U.S. INFLATION DATA AHEAD
Sterling was down 0.1% at $1.316, having hit its lowest since last November on Wednesday at $1.314. The dollar retreated against the Swiss franc to around 0.813 francs, just shy of 11-month peaks.
On the data front, the Fed’s preferred measure of inflation, core personal consumption expenditures, is due for May.
Economists polled by Reuters expect a rise of 3.4%, well above the central bank’s 2% target rate.
“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.”
Further gains could also push Japan to make good on its threats to intervene to support the yen, which traders think will come into play at levels around 162 per dollar or beyond.
“Given the accumulation of yen shorts, we would expect the impact to be significant if intervention were to be carried out,” said Hirofumi Suzuki, SMBC currency strategist in Tokyo.
