The greenback extended gains across major currencies as markets reacted to the Federal Reserve's decision to leave interest rates unchanged while signaling growing concern over inflationary pressures in the world's largest economy.
At the conclusion of its latest policy meeting, the U.S. central bank maintained interest rates within a range of 3.50% to 3.75%. The meeting marked a significant moment for the institution, as it was the first major policy decision under new Federal Reserve Chair Kevin Warsh, who also unveiled plans for a broad review of the central bank's policy framework.
Despite holding rates steady, policymakers struck a more cautious tone on inflation. Nearly half of Federal Reserve officials now expect at least one rate increase before the end of the year, a shift that immediately fueled expectations of tighter monetary policy.
According to LSEG data, traders in the Fed funds futures market are now fully pricing in a rate hike by October. Stronger-than-expected U.S. retail sales figures further reinforced the view that the economy remains resilient enough to withstand higher borrowing costs.
The dollar's advance was reflected across global currency markets. The euro fell 0.3% to $1.146, while the British pound dropped 0.54% to $1.322, with both currencies touching their weakest levels in more than two months.
Meanwhile, the U.S. Dollar Index, which tracks the greenback against a basket of major currencies including the euro, yen and sterling, rose 0.36% to 100.71, its highest reading since May 2025. The index had already surged 0.85% in the previous trading session, marking its largest daily gain in over three months.
Commenting on the market reaction, Lee Hardman, Senior Currency Analyst at MUFG, said:
"The Fed’s hawkish policy update is threatening to trigger a bullish break out for the U.S. dollar."
He added:
"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."
The dollar's rise came despite developments in the Middle East that might ordinarily weaken demand for safe-haven assets. Oil prices retreated after the United States and Iran signed an interim agreement aimed at ending the Iran conflict, reopening the Strait of Hormuz and easing U.S. sanctions on Iranian oil exports.
The agreement reduced fears of supply disruptions in global energy markets, leading to lower crude prices. However, analysts noted that expectations of tighter U.S. monetary policy remained the dominant force driving currency markets.
Kimmy Tong, Global Market and FX Strategist at Everbright Securities International, said investors were still closely monitoring the situation in the Gulf region.
"Markets are examining whether the Strait of Hormuz can be reopened for free passage."
She added:
"Until that is confirmed, sentiment favouring a stronger dollar should continue to dominate" considering the Fed's tightening bias.
Elsewhere, the Australian dollar, often viewed as a barometer of investor risk appetite, slipped 0.1% as traders shifted toward the safety of the U.S. currency.
The Japanese yen remained under intense pressure, weakening to as low as 160.90 per dollar, its lowest level since July 2024. The decline effectively erased gains recorded after Japanese authorities intervened in currency markets on April 30 to support the yen.
The latest slide has reignited concerns in Tokyo about excessive volatility in the foreign exchange market and raised speculation that authorities could intervene again if the currency continues to weaken.
Responding to the yen's decline, Japan's Chief Cabinet Secretary Minoru Kihara reiterated the government's readiness to act.
"We are ready to respond appropriately to currency moves as needed at any time," Kihara told reporters on Thursday.
Investors are also turning their attention to the United Kingdom, where the Bank of England is widely expected to leave interest rates unchanged at 3.75% later on Thursday. Policymakers are assessing whether easing tensions in the Middle East and softer oil prices could reduce inflation risks and influence the future path of monetary policy.
For now, however, the Federal Reserve's increasingly hawkish outlook remains the key driver in global financial markets, strengthening the dollar and placing renewed pressure on rival currencies, particularly the Japanese yen.