The U.S. dollar remained close to a 13-month high on Thursday and was heading toward its strongest monthly gain in almost a year.
Traders continued to expect that the resilient U.S. economy could keep short-term interest rates elevated. Investors were also awaiting key inflation data for further clues about Federal Reserve policy.
The dollar strengthened beyond the $1.14 level against the euro earlier in the week. EUR/USD reached $1.1325 on Wednesday before stabilising near $1.1370 during Asian trading.
Dollar Approaches Four-Decade High Against Yen
The dollar traded at approximately 161.73 yen, placing it close to its highest level against the Japanese currency in more than four decades.
Persistent differences between U.S. and Japanese interest rates have placed significant pressure on the yen.
The dollar’s advance has also affected other major markets. Gold briefly fell below $4,000 per ounce for the first time in more than seven months, while Bitcoin dropped below $60,000 for the first time since 2024.
Dollar Index Reaches 13-Month Peak
The U.S. Dollar Index, which tracks the currency against six major peers, reached a 13-month high of 101.8 on Wednesday.
It traded near 101.5 on Thursday after recording six consecutive sessions of gains.
OCBC strategist Moh Siong Sim said hawkish signals from the Federal Reserve had increased expectations that U.S. interest rates could rise again before the end of the year.
Before the conflict involving the United States, Israel and Iran, traders had expected the Fed to reduce borrowing costs. Markets are now pricing in the possibility of a rate increase as early as October.
US Treasury Yields Support the Dollar
Higher U.S. Treasury yields have strengthened the dollar’s appeal relative to other major currencies.
Since the beginning of May, the two-year U.S. Treasury yield has increased by 27 basis points to 4.15%. In comparison, Germany’s benchmark two-year yield has declined by seven basis points to 2.56%.
At the 10-year maturity, the yield advantage in favour of U.S. government bonds widened by 20 basis points to more than 150 basis points.
Higher U.S. yields can attract international capital because investors receive stronger returns from dollar-denominated assets.
US Economic Outperformance Drives Capital Inflows
Steve Englander, Standard Chartered’s head of global G10 currency research, said the rise in U.S. rates and the dollar reflected expectations that the American economy would outperform other developed markets.
Strong productivity growth, partly driven by artificial intelligence, could support corporate earnings and attract additional foreign investment into the United States.
These capital inflows would provide further support for the dollar.
Sterling and Swiss Franc Remain Under Pressure
The dollar reached a seven-month high against the British pound on Wednesday, with GBP/USD falling to $1.314.
It also climbed to an 11-month high of 0.8139 Swiss francs. Both currency pairs remained close to those levels on Thursday.
Weakness in equity markets placed additional pressure on risk-sensitive currencies, including the Australian and New Zealand dollars.
Australian and New Zealand Dollars Struggle
The Australian dollar traded near $0.69 and had declined approximately 1.8% during the week.
Australia’s May employment report showed an improvement in job creation. However, a downward revision to April’s data limited support for the currency.
The New Zealand dollar had fallen 1.7% during the week and traded near $0.5646. It remained slightly above Wednesday’s seven-month low of $0.5631.
Both currencies remain highly sensitive to movements in global risk appetite and U.S. interest-rate expectations.
Markets Await Core PCE Inflation Data
Investors are now focused on the May core Personal Consumption Expenditures price index.
Core PCE is the Federal Reserve’s preferred inflation measure and could influence expectations for the next U.S. interest-rate decision.
Economists expect the inflation measure to increase. However, the recent decline in oil prices toward pre-war levels could help reduce price pressures over the coming months.
Long-dated U.S. Treasury prices rose sharply before the report, pushing yields lower.
Dollar Rally May Face Short-Term Limits
Spectra Markets President Brent Donnelly said further dollar gains may require a wider interest-rate advantage over other economies.
However, continued corporate demand for dollars could support the currency for several more days.
Donnelly said speculative buying and the breaking of key technical levels had created a dollar-positive feedback loop. Nevertheless, he suggested that the momentum could eventually lose strength.
Japan Intervention Risk Increases
Further dollar gains against the yen could prompt Japanese authorities to intervene in the foreign exchange market.
Traders believe the possibility of intervention could increase if USD/JPY moves beyond the 162 level.
SMBC currency strategist Hirofumi Suzuki said the impact of intervention could be substantial because investors have accumulated large short positions against the yen.
