The US Dollar (USD) has extended its rally against major currencies, driven by a sharp increase in expectations that the Federal Reserve (Fed) will deliver at least two interest rate hikes this year. The US Dollar Index (DXY) rose 0.17% to near 100.93, with the Greenback outperforming peers, particularly the Japanese Yen and the Euro [8]. The CME FedWatch tool shows the probability of at least two Fed rate hikes this year has surged to 58.5%, up from 17.1% a week ago [4][8]. This shift follows the Fed's recent monetary policy announcement, where nine out of 19 policymakers now support a rate hike in 2024, compared to none in March [4][8]. The Fed’s dot plot now projects the Federal Funds Rate to reach 3.6% by year-end, up from the previous 3.1% forecast [4].
The strengthening USD has weighed heavily on other currencies. The Euro (EUR) fell 0.23% against the USD to around 1.1444, with Danske Bank and other analysts maintaining a negative outlook for EUR/USD amid rising US yields and ongoing Middle East tensions [4][6]. The Australian Dollar (AUD) has also come under pressure, with AUD/USD dipping below the key 0.7000 level and approaching an 11-week low of 0.6979 [1][3]. UOB analysts expect a continued downward bias for AUD/USD, targeting the 0.6980 area unless resistance at 0.7045 is breached [3]. However, the AUD has shown relative strength against the Japanese Yen (JPY), with AUD/JPY trading around 113.10, supported by carry-trade activity due to the wide interest rate differential between Australia and Japan [2].
The USD’s strength is also evident in other major pairs. USD/CHF reached year-to-date highs near 0.8100, with a nearly 2% rally over the last four trading days, though technical indicators suggest the move may be overstretched [5]. USD/CAD hit a fresh 14-month high of 1.4193, maintaining a bullish bias as the Canadian Dollar remains the weakest among major currencies against the USD [7].
Geopolitical developments have contributed to market volatility. Progress in US-Iran talks, with both sides agreeing to a roadmap to end hostilities and reopen the Strait of Hormuz within 60 days, initially improved risk sentiment. However, US President Donald Trump's threats to 'take over' Iran if proxy attacks on Israel continue have kept investors cautious [1][2][5].
Looking ahead, market participants are focused on upcoming US economic data, including the preliminary S&P Global PMI for June and the Personal Consumption Expenditure Price Index (PCE) for May, which could further influence Fed policy expectations and USD direction [4][6][8].
CONCLUSION
The US Dollar’s broad-based rally is being fueled by a hawkish shift in Fed expectations, with markets now pricing in multiple rate hikes for 2024. This has led to significant pressure on major currencies such as the Euro, Australian Dollar, and Canadian Dollar. Upcoming US economic data will be closely watched for further clues on the Fed’s policy path and the sustainability of the USD’s strength.