FOREX-Dollar hits one-year high on Fed hike bets; Japan warns on yen

The US dollar index reached a one-year high after the Federal Reserve's hawkish stance led traders to increase bets on rate hikes, driven by inflation concerns and a stronger US economic growth outlook.

The U.S. dollar index hit ‌a one-year ​high on Thursday after a hawkish tilt by the Federal Reserve led traders to ramp up bets on rate increases this year, dragging the yen to its weakest level in two years and drawing warnings from Japanese officials. The U.S. central bank ‌on Wednesday held rates steady in a 3.50% to 3.75% range as Kevin Warsh began his era in charge with a sweeping policy review. Updated interest rate projections showed nearly half of policymakers now expect a hike this year as inflation concerns mount, although the new Fed chair did not provide his view.

The Fed funds futures market is pricing in 68% ‌odds of a rate hike by September, LSEG data showed. A stronger U.S. economic growth outlook is adding to rate hike expectations, with the last three payrolls reports showing much ‌higher monthly jobs gains than economists had predicted. Data on Thursday showed the number of Americans filing claims for unemployment benefits fell last week as layoffs remained low. "We've seen very spectacular data in the U.S. that's been surprising to the upside since late April, then the Fed was as hawkish as market expectations could ever have been, so we've seen more dollar upside," said Sarah Ying, head of FX strategy at CIBC ⁠Capital Markets.

"There's room ​for the greenback to strengthen further." The euro ⁠was last down 0.31% at $1.1463, while sterling fell 0.62% to $1.3206, with both reaching their lowest levels in more than two months.

The dollar index, which measures the greenback against a basket of currencies including the yen, ⁠euro and sterling, rose 0.45% to 100.80, the highest level since May 2025. It surged 0.85% the previous session, its biggest single-day jump in over three months. "The Fed’s hawkish policy update is threatening ​to trigger a bullish breakout for the U.S. dollar," said Lee Hardman, senior currency analyst at MUFG.

"The U.S. dollar has derived support from the sharp adjustment higher for ⁠short-term U.S. rates ... more than offsetting the dampening impact from the U.S.-Iran deal announcement over the weekend," he said. Oil prices fell on Thursday to their lowest level since before the start of the Iran war at ⁠the ​end of February. Some 12.5 million barrels of crude sailed through the Strait of Hormuz overnight, U.S. Vice President JD Vance said, hours after President Donald Trump signed a deal with Iran to end the war that has disrupted global energy supplies. The Japanese yen weakened as far as 161.45 per dollar, its lowest since July 2024, wiping out ⁠gains made after Tokyo's intervention on April 30. A break above the currency pair's 2024 high of 161.99 would send the yen to its weakest level since 1986. The renewed ⁠slide prompted a fresh government response, with officials ⁠reiterating their readiness to support the currency.

"We are ready to respond appropriately to currency moves as needed at any time," Chief Cabinet Secretary Minoru Kihara told a press conference when asked about the yen's decline. Elsewhere, the Bank of England kept interest rates ‌unchanged at 3.75% on Thursday.