The US dollar continued its gains during Wednesday's trading, recording its highest level in 13 months against a basket of major currencies, as investors turned to safe assets amid a sharp sell-off hitting technology stocks, along with rising expectations of a US interest rate hike in the coming months.
The rise of the US dollar coincided with continued volatility in global stock markets, after a sell-off targeting technology and semiconductor companies spread to various major markets, boosting demand for the dollar and bonds as safe havens.
The hawkish statements from Federal Reserve officials also contributed to supporting the US currency, at a time when the US economy continues to show levels of strength that exceed expectations.
Market data indicates that traders are now pricing in a 36% probability of an interest rate hike at the upcoming July meeting, compared to just 8.5% a week ago.
Interest rate bets push the dollar to its highest levels
The probability of an interest rate hike in September has risen to over 70%, compared to just 29.1% a week earlier, reflecting a clear shift in investor expectations regarding US monetary policy.
In light of these developments, the dollar index, which measures the performance of the US currency against a basket of major currencies including the euro and the yen, rose to 101.51 points, its highest level since May 2025.
Ray Attrell, head of foreign exchange strategy at National Australia Bank, said the dollar remains the preferred safe haven for investors in times of turmoil.
He added that the current momentum is clearly in favor of the US dollar, but at the same time he pointed out that the markets have already priced in a large part of these positive factors.
He explained that the dollar may need a broader wave of declining risk appetite, going beyond just the technology sector, or a further rise in interest rate expectations in order to achieve greater gains in the coming period.
The euro and the pound sterling are under the weight of monetary policy.
The euro fell to $1.1363, remaining close to its lowest level in a year, as the gap between US and European monetary policy expectations continued.
The pound also fell slightly to $1.3194, after Bank of England Monetary Policy Committee member Alan Taylor confirmed that keeping interest rates high for an extended period is the most appropriate response to current inflationary pressures.
In risk-averse currency markets, the Australian dollar settled at US$0.6918, its lowest level in 11 weeks.
The Australian dollar's poor performance came after mixed inflation data confounded investors' expectations about the future path of interest rates in Australia.
The New Zealand dollar, however, fell by about 0.3% to US$0.5654, its lowest level in seven months.
Geopolitical tensions boost demand for safe havens
Ongoing disputes between the United States and Iran have contributed to increased demand for safe-haven assets, despite ongoing talks between the two sides.
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Recent statements have revealed differences on a number of key issues in the framework agreement between the two countries, including nuclear issues and the future control of the Strait of Hormuz.
These disagreements have raised new questions about the fragile peace agreement’s ability to hold, prompting some investors to strengthen their positions in the dollar and US bonds.
The yen continues to struggle near historic levels.
The Japanese yen traded at 161.55 yen to the dollar, continuing its inability to recover its losses amid the continued strength of the US currency.
Analysts warn that breaking below 161.96 yen to the dollar would mean the Japanese currency would fall to its weakest level since 1986.
Despite a series of verbal warnings issued by Japanese officials in recent days, these statements have so far failed to alleviate the ongoing pressure on the currency.
Reports indicate that the Japanese government has begun preparing new plans to manage its approximately $1.3 trillion in foreign exchange reserves more effectively, in anticipation of possible intervention in the currency market to support the yen.
Fears of further decline in the Japanese currency
Sayuri Shirai, a former member of the Bank of Japan's board of directors, warned that the yen could fall to 165 yen to the dollar if the Federal Reserve decides to raise interest rates this year.
Meanwhile, a summary of opinions from the Bank of Japan's June monetary policy meeting showed that some board members supported implementing further interest rate hikes.
These members believe that raising interest rates gradually could help bring monetary policy closer to levels considered neutral for the Japanese economy, which could be one of the tools available to support the local currency in the face of current pressures.
With the dollar remaining strong and US interest rate expectations rising, the yen remains one of the most volatile currencies in the coming period, especially as it approaches historic levels that may prompt Japanese authorities to take more decisive action.
