The U.S. dollar continued to hold firm on Thursday, heading toward its strongest monthly gain in nearly a year. The main drivers came from expectations that the U.S. economy remains resilient, short-term yields continue to rise, and markets are betting that the Fed may continue raising interest rates in the coming period.

The Dollar Breaks Key Resistance Levels

The U.S. dollar strengthened sharply against several major currencies this week. Against the euro, the greenback broke through the 1.14 EUR/USD level and at one point pushed EURUSD down to 1.1325, marking the dollar’s strongest level in around 13 months.

During the Asian session, EURUSD stabilized around 1.1353. Meanwhile, USDJPY traded around 161.73, moving close to its highest level in more than four decades against the Japanese yen.

DXY Hits a 13-Month High

The DXY index, which measures the strength of the U.S. dollar against a basket of six major currencies, rose to 101.8 in the previous session, its highest level in 13 months. It later held around 101.6 during the Asian session.

The dollar’s strength is putting pressure on several other assets. Gold fell below USD 4,000 per ounce for the first time in more than seven months, while Bitcoin briefly dropped below USD 60,000 for the first time since 2024.

Fed Rate-Hike Expectations Support the Dollar

One of the key factors driving the U.S. dollar higher is the shift in expectations around U.S. monetary policy.

Tensions related to Iran and the rise in oil prices have caused markets to reverse expectations for Fed rate cuts this year. In addition, hawkish signals from Fed Chair Kevin Warsh last week have led investors to begin pricing in the possibility that the U.S. could raise interest rates as early as October.

Since the start of May, the U.S. 2-year Treasury yield has risen by 27 basis points to 4.15%, while Germany’s benchmark 2-year yield has fallen by 7 basis points to 2.56%. The widening yield advantage in favor of the U.S. continues to support the dollar.

At the 10-year tenor, the yield gap between the U.S. and Germany has also widened by 20 basis points, rising above 150 basis points.

The U.S. Economy and Capital Flows Remain Key Supports

According to Steve Englander, Head of Global G10 Currency Research at Standard Chartered, the rise in rates and the dollar reflects expectations that the U.S. economy will continue to outperform other major economies.

He noted that strong productivity growth, partly driven by artificial intelligence, could support corporate earnings and attract capital inflows into the U.S. This remains a positive factor for the dollar.

Other Major Currencies Remain Under Pressure

The British pound fell to a seven-month low against the dollar, trading around 1.3140. The Swiss franc also weakened as USDCHF climbed to 0.8139, its highest level in 11 months.

Risk-sensitive currencies such as the Australian dollar and New Zealand dollar also remained under pressure due to unstable equity market sentiment. AUD traded around 0.6890, down more than 1.8% for the week, while NZD hovered around 0.5640, near a seven-month low.

Markets Await PCE Inflation Data

The next key focus for markets is the May core PCE data, the Fed’s preferred inflation gauge. This report could directly influence expectations for the future path of interest-rate policy.

Although markets expect the index to rise, the inflation outlook may cool as oil prices have fallen back to pre-conflict levels. This has recently pushed long-term U.S. Treasury yields lower.

Conclusion

The U.S. dollar is being supported by expectations that the Fed may continue raising interest rates, higher U.S. yields compared with other major economies, and confidence in the strength of the U.S. economy.

In the short term, the dollar may continue to maintain its strong position if yield differentials keep widening and corporate demand for dollars remains in place. However, the upcoming PCE inflation data will be an important factor for markets to assess whether the greenback’s rally can continue.

Source: Reuters