Dollar index hits five-week high as Fed bets rise

The US dollar strengthened this week, supported by rising US Treasury yields as resilient macroeconomic data and persistent inflationary pressures increased expectations of additional Federal Reserve rate hikes later this year.

The US Dollar Index (DXY), which tracks the Greenback against a basket of major currencies, climbed to a five-week high of 99.20 at the time of writing.

The index is on course for its strongest weekly performance in two months after gaining around 1.30% over the past five days.

Strong US data boosts dollar demand

Recent US economic data reinforced confidence in the strength of the economy and supported expectations that the Federal Reserve could maintain a tighter monetary policy stance for longer.

Data released on Thursday showed that US Retail Sales remained resilient in April, signalling that consumer spending continues to hold up despite broader economic uncertainties.

At the same time, weekly Initial Jobless Claims indicated further stabilisation in the labour market.

The labour market data suggested that employment conditions remain relatively firm even as geopolitical tensions continue to weigh on investor sentiment.

These developments have strengthened demand for the US dollar, with investors viewing the currency as both a yield-supported and defensive asset during periods of uncertainty.

Inflation pressures lift Fed hike expectations

Inflation figures released earlier in the week also played a key role in supporting the dollar rally.

Consumer and producer inflation data indicated that the impact of the ongoing energy shock has been stronger than previously expected.

The figures prompted investors to increase bets that the Federal Reserve may raise interest rates again before the end of the year.

The shift in expectations pushed US Treasury yields to one-year highs, further increasing the appeal of the dollar to global investors and boosting speculative demand for the currency.

Higher Treasury yields often strengthen the dollar by making US-denominated assets more attractive relative to other global investments.

The combination of resilient economic growth, persistent inflation, and elevated yields has therefore provided strong support to the Greenback throughout the week.

Middle East tensions remain in focus

Geopolitical risks also remained a major driver of market sentiment.

The Indian rupee fell to a fresh all-time low against the US dollar on Friday, pressured by rising crude oil prices and mounting concerns over India’s external sector.

The currency weakened 0.3% to 96.05 per US dollar, surpassing its previous record low of 95.9575 touched in the prior trading session.

The ongoing US-Iran conflict showed little progress toward resolution, while the Strait of Hormuz remained closed.

Oil prices continued to hover around $100 per barrel, raising concerns that higher energy costs could further pressure global growth and inflation.

US President Donald Trump said he was losing patience with Iran following discussions with Chinese President Xi Jinping in Beijing.

Trump is reportedly seeking Chinese support in resolving the Middle East crisis, while also pursuing additional trade facilities for US businesses.

The continued rise in oil prices and uncertainty surrounding the Middle East conflict have added to concerns about the global economic outlook, while simultaneously reinforcing safe-haven demand for the US dollar.