The US dollar climbed to its highest level in more than a year on Tuesday as investors increased bets on further Federal Reserve interest rate hikes.
Higher US Treasury yields and a more hawkish monetary policy outlook strengthened demand for the greenback. Meanwhile, political uncertainty in the United Kingdom and weak eurozone data placed additional pressure on major rival currencies.
US Dollar Index Reaches One-Year High
The US Dollar Index rose to 101.37, marking its highest level in more than a year.
Elevated Treasury yields supported the rally as traders reassessed the likely path of US interest rates. Expectations for additional Federal Reserve tightening have increased sharply since last week’s policy meeting.
Investors interpreted the first meeting under Federal Reserve Chairman Kevin Warsh as more hawkish than expected.
Fed Rate Hike Expectations Rise
Markets are now assigning a 34.2% probability to a rate increase of at least 25 basis points at the Federal Reserve’s July meeting, according to CME FedWatch data.
That represents a significant increase from the 8.5% probability recorded one week earlier.
Expectations for a September rate hike have risen even more sharply. Traders now see a 69.5% chance of higher rates at that meeting, compared with 29.1% the previous week.
The rapid repricing has strengthened US bond yields and made dollar-denominated assets more attractive to global investors.
British Pound Falls After Starmer Resignation
The British pound declined by approximately 0.3% during volatile trading.
Sterling came under pressure after UK Prime Minister Keir Starmer resigned, creating fresh political uncertainty across British financial markets.
Investors are now assessing how a potential change in government leadership could affect public spending, taxation and economic growth.
Dan Coatsworth, head of markets at AJ Bell, said investors may become concerned about how future spending commitments would be financed. Higher taxes could place additional pressure on an economy that is already struggling to generate strong growth.
Euro Drops as Economic Activity Contracts
The euro fell to its lowest level since August 2025 following comments from European Central Bank President Christine Lagarde.
Lagarde played down the risk of second-round inflation effects, reducing expectations that the ECB would need to adopt a more aggressive monetary policy stance.
Fresh economic data added to the pressure on the single currency. Eurozone private-sector activity contracted for a third consecutive month in June, signalling continued weakness across the regional economy.
Investors also shifted their attention away from Middle East de-escalation and toward the longer-term economic and inflationary effects of the recent conflict.
US-Iran Talks Remain in Focus
Markets remain cautiously optimistic about negotiations between the United States and Iran.
Further progress could reduce geopolitical risk and help stabilise global energy markets. Lower oil prices could also ease inflationary pressure and influence the Federal Reserve’s future interest rate decisions.
However, traders remain sensitive to any signs that the talks could break down or regional tensions could return.
US Inflation Data Could Drive the Dollar
Investor attention is now turning to upcoming US economic reports and Federal Reserve commentary.
The May Personal Consumption Expenditures price index is due on Wednesday. The PCE index is the Federal Reserve’s preferred measure of inflation and could significantly influence expectations for interest rates.
Markets will also examine June purchasing managers’ index readings and the revised first-quarter US gross domestic product report.
Together, these releases could determine whether the US dollar rally has enough momentum to reach further annual highs.
Australian Dollar Falls to April Low
The Australian dollar dropped approximately 0.8%, reaching its weakest level since April.
As a risk-sensitive currency, the Australian dollar often comes under pressure when investors move away from higher-risk assets and seek the relative safety of the US dollar.
The stronger outlook for US interest rates also widened the expected yield advantage of dollar-denominated assets.
Japanese Yen Nears Weakest Level Since 1986
The Japanese yen remained under intense pressure, with the USD/JPY exchange rate trading near 161.43.
The yen briefly weakened to 161.93 during the previous session. A move above 161.96 would push the Japanese currency to its lowest level since 1986.
The continued decline has increased speculation that Japanese authorities could intervene again to support the currency.
Japanese Finance Minister Satsuki Katayama held discussions with US Treasury Secretary Scott Bessent on Monday as concerns grew over sharp exchange-rate movements.
Intervention Provides Limited Yen Support
Tokyo reportedly spent tens of billions of dollars in late April and early May in an attempt to strengthen the yen.
However, the intervention provided only temporary support. The wide interest rate gap between Japan and the United States continues to encourage investors to favour the dollar over the yen.
Concerns about Japan’s public spending and fiscal outlook have also weakened confidence in the currency.
The yen continued to fall even after the Bank of Japan raised interest rates last week and indicated that further monetary policy tightening could follow.
