The U.S. dollar climbed toward its strongest monthly performance in almost a year on Thursday as investors positioned for crucial inflation data that could reinforce expectations that the Federal Reserve may raise interest rates again before the end of 2026.
The U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, traded near 101.5 after touching a 13-month high of 101.8 the previous day. Rising U.S. yields and growing expectations of additional Federal Reserve tightening have supported the currency throughout June.
Dollar Strength Pressures Major Currencies
The euro fell below $1.14 after the dollar reached its highest level against the common currency in more than a year. The British pound also weakened to seven-month lows, while the Japanese yen remained near 161.8 per dollar, hovering close to its weakest level in four decades.
The stronger dollar has weighed heavily on other asset classes. Gold briefly dropped below $4,000 per ounce for the first time in more than seven months, while Bitcoin fell below $60,000, its lowest level since 2024.
Markets Price in Additional Fed Rate Hikes
Interest-rate expectations have shifted significantly in recent weeks. Before the conflict involving Iran, markets largely anticipated Federal Reserve rate cuts this year. Investors are now pricing in one rate increase as early as October, with roughly a 50% probability of another hike before year-end.
Short-term Treasury yields have reflected those changing expectations. The U.S. two-year Treasury yield has risen nearly 14 basis points this month to around 4.15%, outpacing moves in European and British government bonds.
Lee Hardman, currency strategist at MUFG, said markets increasingly believe the Federal Reserve will maintain its commitment to controlling inflation.
"If the Fed is serious about restoring price stability, a significant tightening of monetary policy will be required," Hardman said.
Focus Turns to Core PCE Inflation Data
Investors are now awaiting the release of the May Core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge.
Economists expect annual core PCE inflation to rise 3.4%, well above the Fed’s long-term target of 2%.
A stronger-than-expected reading could further boost the dollar and reinforce expectations for additional interest-rate increases, while a softer reading could ease pressure on global currencies and risk assets.
Yen Intervention Risks Increase
The Japanese yen remains under intense pressure as widening interest-rate differentials continue to favor the dollar. Currency traders are closely watching the 162 yen-per-dollar level, which many believe could trigger intervention by Japanese authorities.
Hirofumi Suzuki, chief currency strategist at SMBC, warned that heavy speculative positioning against the yen could amplify any intervention moves.
"Given the accumulation of yen shorts, we would expect the impact to be significant if intervention were to be carried out," Suzuki said.
Market Outlook
The dollar's recent rally reflects a combination of stronger U.S. economic data, rising Treasury yields, and expectations that the Federal Reserve may remain hawkish for longer than previously anticipated.
The upcoming inflation report could become the next major catalyst for global markets, influencing currencies, bond yields, commodities, and risk assets as investors reassess the outlook for U.S. monetary policy.
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