The US Dollar has extended its rally, reaching fresh over-a-year highs against major currencies, driven by mounting expectations of further interest rate hikes by the Federal Reserve. The USD/CAD pair posted a new high around 1.4225 during the European session on Wednesday, with the US Dollar Index (DXY) trading 0.1% higher near 101.50, its highest level in over a year [1][2]. The US Dollar has outperformed all major currencies this week, with the strongest gains against the Australian Dollar (up 1.48%) and notable strength against the Canadian Dollar (up 0.39%) [1].
Market sentiment has shifted sharply in favor of US rate hikes. According to the CME FedWatch tool, the probability of a Fed rate hike this year is nearly 86% [1][3], with a 36.3% chance of a 25-basis-point hike at the July meeting (up from 8.5% a week ago) and a 70.3% chance for September (up from 29.1%) [2]. Nine out of 19 Fed policymakers supported a rate hike this year at the most recent policy meeting [1]. The Federal Open Market Committee (FOMC) voted unanimously to keep rates steady at its June meeting, but the hawkish tone from the Fed, including a commitment to bring inflation down to 2%, has underpinned the Greenback [3].
Technical indicators reflect the US Dollar's strong momentum but also suggest overbought conditions. The DXY's Relative Strength Index (RSI) is near 74, and the USD/CAD RSI is close to 67, both flirting with overbought territory and hinting at the potential for a corrective pause [1][2]. Immediate resistance for the DXY is seen in the 101.95-102.00 zone, with further hurdles at 103.54, while dynamic support is established at 101.48 [2].
The US Dollar's strength has weighed heavily on other currencies. The New Zealand Dollar (NZD) has weakened to near 0.5655 against the USD, marking its sixth consecutive day of losses and trading near its lowest level since late November 2025 [3]. The Kiwi's decline is attributed to the Fed's hawkish stance and heightened geopolitical tensions in the Middle East, though any progress in US-Iran negotiations could help limit further losses [3].
Looking ahead, investors are awaiting the release of the US May Personal Consumption Expenditures (PCE) data on Thursday, which is the Fed’s preferred inflation gauge and could provide further cues on the central bank's policy outlook [1][3].
CONCLUSION
The US Dollar's rally to multi-year highs is being fueled by rising expectations of further Fed rate hikes, as reflected in both market pricing and policymakers' statements. This has led to significant pressure on major currencies such as the Canadian and New Zealand Dollars. Investors are closely watching upcoming US inflation data for additional signals on the Fed's next moves.