Dollar Holds at Over One-Year High as Rate Hike Bets Cool, Yields Dip
By Aboki Forex —
The U.S. dollar firmed on Wednesday and stayed at its highest level in over a year. Weak risk sentiment from struggling technology stocks offset a slight pullback in expectations for further interest rate hikes.
The greenback remained the go-to asset for investors as Wall Street failed to bounce back from a sharp tech sell-off. However, falling oil prices changed the picture for rate watchers.
Crude prices slid to levels seen just before the U.S. and Israel launched their assault on Iran. This led traders to scale back bets on Federal Reserve tightening. They snapped up government bonds instead, pushing U.S. Treasury yields lower.
At 16:40 ET (20:40 GMT), the U.S. dollar index rose 0.2% to 101.58. That is its highest since mid-May 2025.
The Fed struck a much more hawkish tone last week. At least half of its policymakers now expect rate hikes this year to fight inflation from surging oil prices due to the Middle East conflict. Currency markets initially responded by raising their own rate hike expectations. The dollar has gained every day this week as higher rates typically strengthen the currency.
U.S. Treasury yields also jumped after the Fed's hawkish turn as bonds were sold off. But that trend reversed as oil prices tumbled.
The reopening of the Strait of Hormuz and improving shipping activity through the waterway drove crude lower. Brent futures expiring in September hit their lowest level since February 27, just a day before the joint assault on Iran began.
Investors trimmed their rate hike expectations, according to the CME FedWatch tool. The benchmark 10-year yield fell 9 basis points to 4.396%. The more rate-sensitive 2-year yield dropped 5 basis points to 4.146%.
José Torres, senior economist at Interactive Brokers, said the recovery in commercial traffic along the Strait of Hormuz is sparking a Treasury rally. He noted that inflation concerns are easing as crude plunges below $70 a barrel. The relief in price pressure expectations is driving strong fixed-income performance as yields fall.