The US dollar is on track on Thursday for its biggest monthly gain in nearly a year, ahead of US inflation data that could reinforce the view of a growing number of investors that the Federal Reserve will be forced to raise interest rates at least once this year.
The dollar hit a 13-month high against the euro on Wednesday, pushing the single currency below the $1.14 level. The dollars strength also sent the British pound to its lowest level in seven months and kept the Japanese yen near its weakest level in 40 years at around 161.79 per dollar.
The stronger dollar pushed gold temporarily below $4,000 per ounce for the first time in more than seven months and drove Bitcoin below $60,000 for the first time since 2024.
The Dollar Index, which measures the US currency against a basket of six major currencies, stood near 101.5 points on Thursday after touching a 13-month high of 101.8 points the previous day.
Before the outbreak of the US-Israel war against Iran, traders had expected the Federal Reserve to cut interest rates this year. They now expect at least one rate hike, possibly beginning in October, with roughly a 50% chance of a second hike before year-end.
During this month alone, the yield on two-year US Treasury notes, which reflects short-term interest-rate expectations, has risen by about 14 basis points to 4.15%.
By comparison, German two-year government bond yields have risen by only 2 basis points to 2.56%, while UK two-year government bond yields have fallen by about 9 basis points.
Lee Hardman, currency strategist at MUFG Bank, said the interest-rate market clearly reflects investors belief that the Federal Reserve will back up its hawkish inflation rhetoric by raising interest rates this year.
He added: If the Federal Reserve is serious about restoring price stability, significantly tighter monetary policy will be necessary. Therefore, it makes sense for markets to price in additional rate hikes, which has recently supported the US dollar.
US inflation data in focus
The British pound rose 0.17% to $1.319 after falling on Wednesday to its lowest level since November at $1.314.
The dollar slipped against the Swiss franc to around 0.811 francs, remaining close to an 11-month high.
On the economic front, markets are awaiting the release of May core Personal Consumption Expenditures data, the Federal Reserves preferred inflation gauge.
Economists surveyed by Reuters expect the index to rise 3.4%, well above the central banks 2% target.
Brent Donnelly, president of Spectra Markets, said: Further gains for the dollar will require a wider expansion in interest-rate differentials, but in the short term companies need dollars, and they will continue to need them for a few more days.
He added: My view is that this creates a positive feedback loop for the dollar, as speculators add new positions and technical indicators continue to move in its favor, but that loop will likely lose momentum soon.
Further dollar gains could push Japan to carry out its intervention threats in support of the yen, as traders see levels near 162 yen per dollar or higher as a potential intervention zone.
Hirofumi Suzuki, chief currency strategist at SMBC Bank in Tokyo, said: Given the build-up of short yen positions, the impact of any intervention would be significant if it is carried out.