Dollar hits 13-month high as Fed rate bets fuel safe-haven demand

The Federal Reserve's hawkish stance and escalating global risks have pushed the dollar index to a 13-month high above 101.7, draining liquidity from risk assets and pressuring currencies from Tokyo to Frankfurt.

"The US dollar is still the preferred safe haven," said Ray Attrill, head of FX strategy at National Australia Bank. "Obviously the momentum is on its side at the moment, but I think there is a lot priced in."

The dollar index reached 101.71 Wednesday, its highest since May 2025, after clearing resistance between 100.0 and 100.6. The euro slid 0.35% to $1.134, a more than one-year low, while sterling fell to $1.3149, its weakest in seven months. The Japanese yen traded at 161.66 per dollar, approaching the 161.96 level that would mark its lowest since 1986.

A sustained dollar rally raises costs for foreign borrowers, compresses emerging-market currencies and threatens multinational earnings. With the CME FedWatch tool pricing a 35% probability of a rate hike at the July meeting — up from 9% a week ago — the greenback's trajectory may determine the summer direction for equities, commodities and crypto alike.

The dollar's latest leg higher follows the Fed's June 17 decision to hold rates at 3.50% to 3.75% while keeping the door open to further tightening. Consumer prices rose 4.2% in May, the hottest reading since April 2023, reinforcing expectations that the central bank will need to act. Markets now see a greater than 70% chance of a rate increase by September, up from 29% a week earlier.

"The move lower in EUR/USD has been driven by the recent divergence in market expectations for ECB and Fed policies," said Lee Hardman, senior currency analyst at MUFG. "While the US rate market has moved to price in multiple Fed rate hikes, the euro zone rate market has become less confident over the need for further ECB rate hikes."

Rate Differentials Drive the Yen to 38-Year Lows

The yen remains the most pressured major currency, with the dollar-yen pair testing levels not seen since 1986. Japanese officials have issued verbal warnings in recent days, but intervention risks have done little to slow the slide. Former Bank of Japan policymaker Sayuri Shirai said the yen could weaken to 165 per dollar if the Fed raises interest rates this year.

Some Bank of Japan board members at their June policy meeting called for additional rate hikes to push the policy rate closer to neutral, a summary of opinions showed Wednesday. Yet the gap between US and Japanese yields continues to widen, keeping the carry trade firmly in the dollar's favor.

Speculators have piled into the trade. Non-commercial net long positioning on the dollar has swelled toward $28 billion, near the highs of 2024 and 2025, according to CFTC data. Crowded positioning can act as a contrarian caution, but similar dollar strength preceded the powerful 2021 and 2022 rally.

Technical Levels Point Higher

On the daily chart, the dollar index is riding an ascending trendline from the February low near 95.5. The Relative Strength Index is turning up toward 70, signaling building momentum. The next target sits near 102, the May 2025 swing-high zone, with a measured move from the June 18 breakout pointing to the same level. A push through 102 would open the door to resistance between 103.0 and 103.3.

Support rests at the 100 shelf and the rising trendline. A drop back below 100 would weaken the bullish case and offer relief to risk assets. For now, momentum favors the dollar.

The last time the dollar traded at these levels in mid-2025, the S&P 500 fell 4% over the following six weeks while gold dropped 6%, illustrating the cross-asset weight a strong greenback carries. If the current breakout holds, history suggests further pressure on equities, commodities and emerging-market currencies in the weeks ahead.

This article is for informational purposes only and does not constitute investment advice.