The U.S. dollar has surged past critical chart resistance levels, positioning itself for its sharpest monthly gain in almost a year. This movement is largely driven by trader bets that a robust American economy will sustain higher short-term interest rates, even as the market awaits crucial inflation data. The currency has decisively broken the $1.14 threshold against the euro, recently touching a 13-month high of $1.1325 overnight before settling in Asia around $1.1353.
Against the struggling Japanese yen, the dollar reached 161.73, narrowly missing its highest level in over four decades. The broad dollar index, which tracks the currency against a basket of six major peers, also hit a 13-month peak of 101.8 overnight before stabilizing near 101.6 during Asian trading hours.
The strengthening greenback has had immediate ripple effects across asset classes. Gold prices fell below $4,000 an ounce for the first time in more than seven months, while Bitcoin briefly dropped under $60,000, marking its lowest point since 2024. The shift in market sentiment is also reflected in broader currency pairs, with the dollar reaching a seven-month high against the British pound at $1.314 and an 11-month peak against the Swiss franc at 0.8139.
Market expectations for U.S. monetary policy have shifted dramatically following the Iran conflict and the subsequent spike in oil prices. These geopolitical developments have effectively reversed earlier bets on rate cuts for this year. Compounding this shift is the unexpectedly hawkish tone from Kevin Warsh, the new Federal Reserve chair, whose debut last week has led traders to price in a potential rate hike as early as October.
Interest rate differentials are widening in favor of the U.S., further fueling dollar strength. Since the start of May, two-year U.S. Treasury yields, which are closely tied to short-term rate expectations, have risen by 27 basis points to 4.15%. In contrast, the benchmark German two-year yield has fallen by 7 basis points to 2.56%. At the 10-year tenor, the yield gap favoring the U.S. has widened by 20 basis points over the same period, now exceeding 150 basis points.
Steve Englander, head of global G10 currency research at Standard Chartered in New York, attributes this move to expectations of both cyclical and structural U.S. economic outperformance. He notes that strong productivity growth, partly driven by artificial intelligence, is expected to support higher corporate earnings. This dynamic should, in turn, attract dollar-positive capital inflows.
The impact is particularly noticeable in risk-sensitive currencies from the Antipodes. Shaky equity markets have added pressure on the Australian and New Zealand dollars. The Australian dollar, down more than 1.8% for the week, was trading at $0.6890 ahead of May jobs data, which is expected to show some recovery from April’s weakness. The New Zealand dollar, down 1.7% for the week, held steady at $0.5640, just above its seven-month low of $0.5631 hit on Wednesday.
Investors are now turning their attention to the Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures report for May, scheduled for release later on Thursday. While a rise is anticipated, the outlook suggests inflation may cool as oil prices have retreated to pre-war levels. This expectation has already triggered sharp rallies in overnight long-dated U.S. Treasuries, lowering yields.
Brent Donnelly, president at analytics firm Spectra Markets, notes that further dollar gains will depend on continued widening of rate differentials. However, he highlights a short-term demand from corporations for dollars that may sustain the currency's momentum for several more days. Donnelly describes a "USD-positive feedback loop" where speculators are adding positions and technical indicators are breaking to the upside, a dynamic he believes is likely to burn itself out soon.