The US dollar extended its gains on Wednesday to reach its highest level in 13 months against a basket of major currencies, as investors moved into safe-haven assets amid a selloff in technology stocks and prepared for the possibility of further interest rate hikes by the Federal Reserve.

Volatility persisted in equity markets following a broad selloff across the technology and semiconductor sectors, boosting demand for both the US dollar and government bonds as safe-haven assets.

At the same time, expectations for higher US interest rates continued to rise as Federal Reserve officials adopted a more hawkish tone amid ongoing strength in the US economy.

Tensions surrounding the framework agreement between the United States and Iran also supported demand for safe-haven assets after disagreements emerged between the two sides over several key issues.

The US Dollar Index, which measures the performance of the greenback against a basket of major currencies, rose to 101.69 points, its highest level since May 2025, before stabilizing with gains of 0.2% during trading.

Dollar remains the preferred safe haven

Ray Attrill, Head of FX Strategy at National Australia Bank, said that "the US dollar remains the preferred safe-haven currency."

He added that current momentum continues to favor the greenback, although "much of these moves has already been priced into the market."

According to the CME FedWatch Tool, markets are currently pricing in a 36% probability of a Federal Reserve rate hike at the July meeting, compared with just 9% a week ago.

For the September meeting, the probability of a rate hike has climbed to more than 70%, up from 29% previously.

The euro fell 0.3% to $1.1340, its lowest level in more than a year, as dollar strength continued to dominate currency markets.

Lee Hardman, Senior Currency Analyst at MUFG, said the decline in EUR/USD reflected "the recent divergence in market expectations for European Central Bank and Federal Reserve policy."

He explained that US interest rate markets have started pricing in several potential rate hikes by the Federal Reserve, while eurozone markets have become less convinced about the need for further tightening by the European Central Bank.

Yen weakness persists amid intervention pressure

Sterling edged lower against the dollar to $1.319 after Bank of England Monetary Policy Committee member Alan Taylor said that "keeping interest rates unchanged for an extended period" is the appropriate response to inflationary pressures.

The Australian dollar, which is highly sensitive to risk sentiment, also fell 0.3% to $0.689, its lowest level since early April, as mixed inflation data increased uncertainty about future rate hikes.

Meanwhile, the Japanese yen remained under pressure, trading at 161.69 per dollar and struggling to regain strength as the US currency continued to advance.

A move above 161.96 would push the yen to its weakest level since 1986.

Repeated verbal warnings from Japanese officials this week have failed to ease pressure on the currency, while the Japanese government has begun preparing plans to manage its $1.3 trillion in foreign exchange reserves more effectively in order to support potential intervention efforts.

Former Bank of Japan board member Sayuri Shirai said the yen could weaken to 165 per dollar if the Federal Reserve raises interest rates this year.

At the same time, the summary of opinions from the Bank of Japan's June policy meeting showed that some members called for additional rate hikes to move the central bank's policy rate toward levels considered more neutral for the economy.