US dollar rises as hawkish Fed expectations lift Treasury yields

The US dollar maintained its upward momentum early Wednesday after outperforming major global currencies in the previous session, supported by rising US Treasury bond yields and growing expectations of tighter Federal Reserve policy.

Investors are now closely watching the US Treasury’s 20-year note auction later in the day, along with the release of minutes from the Federal Reserve’s April policy meeting, for further direction on interest rates and inflation.

Treasury yields support US dollar strength

The greenback strengthened on Tuesday as surging Treasury yields reinforced expectations that the Federal Reserve could tighten monetary policy further to contain inflationary pressures.

The US Dollar Index, which gained nearly 0.4% on Tuesday and touched its highest level since early April, continued to hold modest gains around 99.40 during the European trading session on Wednesday.

According to the CME FedWatch Tool, markets are currently pricing in nearly a 60% probability that the Federal Reserve will raise interest rates by 25 basis points at least once before the end of the year.

The stronger yield environment has continued to support demand for the US currency against its major peers.

Iran tensions remain in focus

Geopolitical developments also remained on investors’ radar following fresh comments from US and Iranian officials regarding the ongoing tensions surrounding nuclear negotiations.

US Vice President JD Vance said on Tuesday that President Donald Trump was still pursuing a diplomatic solution to the conflict with Iran.

However, Vance added that the administration remained “locked and loaded” to restart the military campaign if nuclear talks fail.

Meanwhile, Iran’s Foreign Minister Abbas Araghchi said Tehran had gained military knowledge from previous hostilities and warned that “a return to war will feature many more surprises.”

The remarks kept geopolitical risks elevated, contributing to cautious sentiment across financial markets.

UK inflation cools more than expected

In the United Kingdom, fresh inflation data showed consumer price pressures easing faster than expected in April.

The UK’s Office for National Statistics reported on Wednesday that annual inflation, measured by the Consumer Price Index, slowed to 2.8% in April from 3.3% in March.

The reading also came in below the market expectation of 3%.

However, producer prices continued to rise sharply.

The Producer Price Index input measure increased 7.7% year-on-year, accelerating from the 5.3% rise recorded in March.

Following the data release, GBP/USD traded in a narrow range below the 1.3400 level as traders assessed the implications for future Bank of England policy decisions.

Gold extends losses as dollar rallies

Gold prices remained under heavy pressure after suffering steep losses during the previous session.

After declining nearly 2% on Tuesday, XAU/USD extended its downward move during Asian trading hours on Wednesday and touched its lowest level since late March near $4,450.

The precious metal later recovered slightly above $4,470 during the European morning session, although broader sentiment remained weak as the stronger dollar and higher bond yields reduced demand for non-yielding assets.

The euro and yen remain under pressure

The euro also struggled to recover against the dollar.

EUR/USD remained below the 1.1600 mark early Wednesday after falling around 0.4% in the previous trading session.

Meanwhile, USD/JPY consolidated near 159.00 after posting gains for seven consecutive trading days on Tuesday.

Japanese Prime Minister Sanae Takaichi said on Wednesday that the government was not yet in a position to comment on the scale of an additional budget.

She added that any extra budget could mainly focus on addressing developments related to the Middle East situation.