By Renae Dyer
The dollar rose to a one-year high against a basket of currencies on Friday, boosted by expectations the Federal Reserve could raise interest rates in coming months.
The Federal Reserve held its benchmark rate in a range of 3.5% to 3.75% on Wednesday but officials’ quarterly projections showed nine of 19 officials penciled in at least one rate rise by year-end, up from none in March.
In his first meeting as the Fed’s new Chair, Kevin Warsh emphasized a commitment to price stability and bringing inflation back to the 2% target.
The meeting prompted markets to bring forward expectations for a rate increase. Data on LSEG in early European trade implied a 90% chance of a 25 basis-point rate rise in September with a move fully priced by October. Markets were previously not pricing in a chance of tightening until later in the year.
The dollar has continued to rally since the Fed’s decision and in early European trade the DXY dollar index reached 101.127, its highest level since May 2025. The euro fell to a three-month low of $1.1416, LSEG data showed.
The dollar’s gains came even as oil prices have eased recently after the U.S. and Iran signed an interim peace deal on Wednesday.
The recent decline in oil prices has led to lower rate expectations for most central banks but this doesn’t apply to the Fed, Commerzbank foreign exchange and commodity analyst Volkmar Baur said in a note.
“This is due in no small part to the ongoing euphoria surrounding artificial intelligence,” he said.
Investments in AI continue to drive U.S. growth, which is why the market no longer expects rate cuts, he said. Competition for U.S. Treasury bonds in the capital market is intensifying as companies raise funds to finance AI investments, which is also driving up U.S. rates, he said.
The dollar’s appreciation came on the Juneteenth public holiday when U.S. stock and bond markets are closed. This tends to reduce trading activity and liquidity.
However, analysts at ING weren’t convinced the dollar’s gains would last.
The U.S.-Iran deal removes a positive argument for the dollar and markets are overestimating the chances of a Fed rate rise, ING foreign exchange strategist Francesco Pesole said in a note.
“In the near term, the dollar may enjoy post-Fed enthusiasm for a bit longer, with markets probably keen to fully price two hikes by December at the first strong data print.”
-Write to Renae Dyer at [email protected]