U.S. Dollar Reaches One-Year High After Hawkish Fed Decision
The U.S. dollar index climbed to its highest level in a year on Thursday after the Federal Reserve delivered a more hawkish policy message.
Traders increased their expectations for additional interest rate hikes in 2026. Meanwhile, the Japanese yen fell to its weakest level in two years, prompting fresh warnings from government officials in Tokyo.
Federal Reserve Keeps Interest Rates Unchanged
The Federal Reserve left its benchmark interest rate unchanged within a range of 3.50% to 3.75% on Wednesday.
The meeting marked the beginning of Kevin Warsh’s leadership of the central bank. It also included the launch of a broad review of the Fed’s monetary policy framework.
Although rates remained steady, updated projections revealed a noticeable change among policymakers. Nearly half now expect at least one interest rate increase during 2026 as concerns about persistent inflation continue to grow.
Warsh did not clearly disclose his own position on the possibility of a rate hike.
Markets Increase Bets on a September Rate Hike
Interest rate futures now indicate a 69% probability that the Federal Reserve will raise rates by September, according to LSEG data.
The improving outlook for the U.S. economy has strengthened those expectations. The three most recent payroll reports showed substantially stronger employment growth than economists had forecast.
Separate data released on Thursday also showed that weekly U.S. unemployment claims declined. Layoffs remained relatively low, providing further evidence of resilience in the labour market.
Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets, said recent U.S. economic figures had repeatedly exceeded expectations.
She added that the Federal Reserve delivered an extremely hawkish policy update, creating additional room for the dollar to strengthen.
Euro and British Pound Fall Against the Dollar
The stronger U.S. dollar placed pressure on several major currencies.
The euro declined by approximately 0.17% to $1.1479. The British pound fell around 0.35% to $1.3245.
Both currencies reached their lowest levels in more than two months.
The U.S. dollar index, which tracks the greenback against currencies including the euro, yen and pound, rose by 0.24% to 100.59. Earlier in the session, it reached 100.8, its highest level since May 2025.
The index had already gained 0.85% during the previous session. That represented its largest one-day increase in more than three months.
Hawkish Fed Outlook Supports a Dollar Breakout
Lee Hardman, senior currency analyst at MUFG, said the Federal Reserve’s policy update could trigger a bullish breakout for the U.S. dollar.
A sharp rise in short-term U.S. interest rate expectations has increased the appeal of dollar-denominated assets.
This support proved stronger than the negative impact of the recently announced agreement between the United States and Iran.
U.S.-Iran Agreement Pushes Oil Prices Lower
Oil prices declined after the United States and Iran signed an interim agreement intended to end their conflict.
The deal could also reopen the Strait of Hormuz and remove U.S. sanctions affecting Iranian oil exports.
Normally, improving geopolitical conditions can weaken demand for safe-haven currencies such as the dollar. However, the decline in oil prices and lower geopolitical risk were not enough to stop the greenback’s advance.
Kimmy Tong, global market and foreign exchange strategist at Everbright Securities International, said investors are waiting for confirmation that ships can move freely through the Strait of Hormuz.
Until that happens, she believes market sentiment could continue to favour a stronger dollar.
Australian Dollar Records a Modest Gain
The Australian dollar performed better than most other major currencies.
The risk-sensitive currency gained approximately 0.2% against the U.S. dollar, trading near $0.7028.
However, its advance remained limited as expectations for higher U.S. interest rates continued to support the greenback.
Japanese Yen Falls to Two-Year Low
The Japanese yen weakened to approximately 160.94 against the dollar, reaching its lowest level since July 2024.
The decline erased the gains recorded after Japanese authorities intervened in the foreign exchange market on April 30.
The renewed weakness prompted another response from officials in Tokyo.
Chief Cabinet Secretary Minoru Kihara said the government remained ready to take appropriate action against excessive currency movements whenever necessary.
His comments increased speculation that Japan could intervene again if the yen continues to weaken rapidly.
Bank of England Holds Rates at 3.75%
Elsewhere, the Bank of England kept its benchmark interest rate unchanged at 3.75% on Thursday.
The decision offered little support to the British pound, which remained under pressure from the strengthening U.S. dollar and changing expectations for Federal Reserve policy.
