NEW YORK: The US dollar index hit a one-year high on Thursday after a hawkish tilt by the Federal Reserve led traders to ramp up bets on rate increases this year, dragging the yen to its weakest level in two years and drawing warnings from Japanese officials.
The US central bank on Wednesday held rates steady in a 3.50 percent to 3.75 percent range as Kevin Warsh began his era in charge with a sweeping policy review.
Updated interest rate projections showed nearly half of policymakers now expect a hike this year as inflation concerns mount, although the new Fed chair did not provide his view.
The Fed funds futures market is pricing in 69 percent odds of a rate hike by September, LSEG data showed.
A stronger US economic growth outlook is adding to rate hike expectations, with the last three payrolls reports showing much higher monthly jobs gains than economists had predicted. Data on Thursday showed the number of Americans filing claims for unemployment benefits fell last week as layoffs remained low. “We’ve seen very spectacular data in the US that’s been surprising to the upside since late April, then the Fed was as hawkish as market expectations could ever have been, so we’ve seen more dollar upside,” said Sarah Ying, head of FX strategy at CIBC Capital Markets.
“There’s room for the greenback to strengthen further.”
The euro was last down 0.17 percent at USD1.1479, while sterling fell 0.35 percent to USD1.3245, with both reaching their lowest levels in more than two months.
The dollar index, which measures the greenback against a basket of currencies including the yen, euro and sterling, rose 0.24 percent to 100.59, and reached 100.8, the highest since May 2025. It surged 0.85 percent the previous session, its biggest single-day jump in over three months.
“The Fed’s hawkish policy update is threatening to trigger a bullish break out for the US dollar,” said Lee Hardman, senior currency analyst at MUFG.
“The US dollar has derived support from the sharp adjustment higher for short-term US rates … more than offsetting the dampening impact from the US-Iran deal announcement over the weekend,” he said. Oil prices eased on Thursday after the US and Iran signed an interim agreement that would end the Iran war, reopen the Strait of Hormuz and waive US sanctions on Iranian oil, sapping some strength from the safe-haven greenback.
Yet the fall did little to stop the dollar rising.
“Markets are examining whether the Strait of Hormuz can be reopened for free passage,” said Kimmy Tong, global market and FX strategist at Everbright Securities International.
“Until that is confirmed, sentiment favouring a stronger dollar should continue to dominate,” she said.
The risk-sensitive Australian dollar gained 0.2 percent versus the greenback to USD0.7028.
The Japanese yen weakened to as low as 160.94 per dollar, its lowest since July 2024, wiping out gains made after Tokyo’s intervention on April 30. The renewed slide prompted a fresh government response, with officials reiterating their readiness to support the currency.
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