A surging dollar has surpassed chart resistance and is on track for its most significant monthly gain in nearly a year on Thursday, as traders anticipate a robust U.S. economy supporting short-term interest rates while awaiting crucial inflation data. The dollar has surpassed the $1.14 threshold against the euro this week, reaching its peak in 13 months at $1.1325 overnight, before stabilising in Asia at approximately $1.1353. At 161.73 yen, it is nearly at its peak in over forty years for the faltering Japanese currency. The strength of the dollar has resulted in gold prices falling below $4,000 an ounce for the first time in over seven months, while bitcoin briefly dipped below $60,000 for the first time since 2024. The dollar index, which measures the currency against a basket of six major peers, reached a 13-month peak at 101.8 overnight and began the Asia session stable around 101.6. The conflict in Iran and the surge in oil prices have altered market anticipations regarding U.S. interest rate reductions this year.

Additionally, Kevin Warsh’s unexpectedly hawkish introduction as Federal Reserve chair last week has led traders to factor in a potential U.S. rate increase as early as October. Since the start of May, 2-year U.S. Treasury yields, which track short-term rates expectations, have increased by 27 basis points to 4.15%, while Europe’s benchmark German 2-year yields have decreased by 7 basis points to 2.56%. At the 10-year tenor, the differential favouring U.S. yields expanded by 20 basis points during the same timeframe, surpassing 150 basis points. “We believe the move in ​rates and the dollar reflects expectations of cyclical and structural U.S. economic outperformance,” stated Steve Englander. “Strong productivity growth, partly AI-driven, should support higher earnings and lead to dollar-positive capital inflows,” he said.

The dollar reached a seven-month peak against the sterling overnight at $1.314 and achieved an 11-month high of 0.8139 Swiss francs. Volatile equity markets have further exacerbated challenges for the risk-sensitive Antipodeans, and there was minimal relief for the Australian and New Zealand currencies on Thursday, even in the face of more stable stock performance. The Australian dollar, having declined over 1.8% for the week to date, faced downward pressure at $0.6890 in anticipation of the May employment figures, which are expected to show some recovery from the weaknesses observed in April. The New Zealand dollar, having declined by 1.7% this week, was positioned at $0.5640, marginally above Wednesday’s seven-month low of $0.5631.

Later on Thursday, the Fed’s preferred inflation measure, core personal consumption expenditures, is scheduled for release for May. A rise is anticipated; however, the outlook suggests that with oil prices having reverted to pre-war levels, inflation is expected to ease. Concurrently, long-dated U.S. Treasuries experienced a significant rally overnight, resulting in lower yields. “Further USD gains will require further (widening) in rate differentials, but in ⁠the short ​term the corporates need dollars and will keep needing dollars for a ​few more days,” stated Brent Donnelly. “My view is that this is creating a USD-positive feedback loop where (speculators) are adding ​and technicals are breaking, and that feedback loop will probably burn itself out soon.”