The U.S. dollar headed Thursday for its highest end-of-day level in more than a year, as investors continued to digest the implications of Wednesday's Federal Reserve meeting - the first with Chair Kevin Warsh at the helm.
U.S. stocks sold off on Wednesday as Warsh's terse commentary, coupled with the latest batch of official Fed projections on the path of interest rates, helped to bolster expectations for a rate hike later this year. Investors bracing for a hike have helped boost the value of the U.S. dollar to its highest level in more than a year.
The ICE U.S. dollar index DXY, which measures the dollar's strength against a basket of major currencies, was up 0.7% on Thursday afternoon at around 100.80, according to Dow Jones Market Data. It was on pace for its highest end-of-day level since May 16, 2025, when it finished at 101.09, according to Dow Jones Market Data.
Fed funds futures, which traders use to bet on the path of interest rates, were pricing in an 86.4% chance Thursday that the central bank would raise interest rates at least once this year, according to data from CME Group. That was up from 80.5% a day earlier and 57.1% a week ago.
The dollar's move is worth watching because it could become another headwind for a stock market trying to balance high valuations and uncertainty over the path of interest rates. A stronger dollar can hurt the overseas earnings of large U.S. multinationals, while also tightening financial conditions for companies and countries that borrow in dollars. It could also weigh on stocks trading abroad, particularly in emerging markets with open economies.
For now, the Fed's message has helped widen the perceived gap between U.S. rates and those in other major economies. This has helped support the dollar.
"So you've got the increasing rate differentials between the U.S. and the rest of the world," said Jeff Klingelhofer, managing director and portfolio manager for Aristotle Pacific Capital.
The dollar has also rallied as investors reassessed concerns about the U.S. fiscal outlook, Klingelhofer said in a phone interview.
The U.S. economy has strong underlying growth, but worries about large fiscal deficits had been acting as a headwind for the dollar, especially given its role as the world's reserve currency, he noted. If investors think the Fed is serious about keeping inflation under control, that could ease some of those concerns and support the dollar, he said.
Others expect that the dollar could struggle to extend its rally much further if easing geopolitical tensions continue to push oil prices lower and reduce pressure on inflation. Oil prices continued to slide after the U.S. and Iran on Wednesday signed a preliminary agreement aimed at ending the war. Oil prices have recently traded in lockstep with Treasury yields, and lower Treasury yields tend to drag the dollar lower as well.
"We think that the bar for further dollar gains from here is quite high," said Matthew Ryan, head of market strategy at global financial-services firm Ebury.
"The imminent signing of the Iran framework peace deal means that oil prices could continue to ease, which should alleviate pressure on U.S. inflation and may preclude hikes in the second half of the year," Ryan wrote in a Thursday note.
At the same time, technical strategists have pointed to signs that the dollar's recent rally could continue to run. The dollar index's push toward a fresh 52-week high is being confirmed by momentum indicators on both a daily and weekly basis, according to Tyler Richey, technical analyst and co-editor at Sevens Report.
This is making this most recent breakout look more durable than other recent dollar rallies over the past year, which quickly faded.
U.S. stocks ended Thursday higher, with the Dow Jones Industrial Average DJIA up 0.1%. The S&P 500 SPX finished 1.1% higher, and the Nasdaq Composite COMP gained 1.9%.
Comments