Demand for the greenback increased as investors moved away from riskier assets following sharp declines in technology and semiconductor stocks, which have weighed heavily on global equity markets. The retreat in risk appetite has prompted increased flows into traditionally safer investments, including the U.S. dollar and government bonds.
The dollar index, which tracks the U.S. currency against a basket of major peers including the euro and Japanese yen, rose to 101.44, its strongest level since May 2025. The latest gains underline the dollar's continued appeal during periods of market uncertainty.
Fed Rate Hike Expectations Fuel Dollar Rally
Adding momentum to the dollar's advance are mounting expectations that the U.S. Federal Reserve may tighten monetary policy further.
Recent comments from Federal Reserve officials have reinforced perceptions that policymakers remain concerned about inflationary pressures and the resilience of the U.S. economy. As a result, traders have significantly increased their bets on additional rate hikes in the coming months.
Market pricing now reflects a 37 percent probability of a 25-basis-point rate increase at the Fed's July meeting, up sharply from just 8.5 percent a week earlier. Expectations for a September rate hike have also risen substantially, with markets assigning a 70 percent chance compared to 29.1 percent previously.
According to Ray Attrill, the dollar continues to benefit from its status as the world's preferred safe-haven currency.
"The U.S. dollar is still the preferred safe-haven," said Attrill.
However, he suggested that much of the positive outlook may already be reflected in current market prices.
"Obviously the momentum is on its side at the moment, but I think there is a lot priced in," he said. "We'll have to see a correction in risk sentiment, one that's broader rather than just the tech sector, or the market further ratcheting up its expectations for hikes, before the dollar can go very much higher from here."
Euro, Pound and Commodity Currencies Under Pressure
The stronger dollar weighed on several major currencies.
The euro remained near a one-year low, trading around $1.1375, while the British pound slipped to $1.3199 after comments from Alan Taylor suggested that maintaining current interest rates for an extended period may be the appropriate response to ongoing inflation concerns in the United Kingdom.
Risk-sensitive currencies also struggled to gain traction. The Australian dollar held steady at $0.6918 ahead of the release of key inflation data, while the New Zealand dollar weakened slightly to $0.5665, marking its lowest level in seven months.
Geopolitical Tensions Add to Safe-Haven Demand
Investor caution was also heightened by renewed geopolitical uncertainty involving the United States and Iran.
Reports indicating disagreements over major elements of their diplomatic framework, including nuclear issues and control of the strategically important Strait of Hormuz, have raised doubts about the durability of a fragile peace arrangement between the two countries.
The uncertainty has further encouraged investors to seek refuge in safe-haven assets, supporting the dollar's upward trajectory.
Japanese Yen Remains Under Heavy Pressure
Among the major currencies, the Japanese yen continued to face significant headwinds.
The currency traded around 161.57 per dollar after briefly touching 161.93 earlier in the week, its weakest level in nearly two years. A move beyond 161.96 would push the yen to its lowest level since 1986.
Despite repeated verbal interventions from Japanese authorities aimed at supporting the currency, markets remain skeptical about the likelihood of direct intervention. Wide interest rate differentials between the United States and Japan continue to favor the dollar.
Former Sayuri Shirai warned that the yen could weaken further to 165 per dollar if the Federal Reserve proceeds with additional rate increases this year.
Meanwhile, a summary of discussions from the latest meeting of the Bank of Japan revealed that some policymakers are advocating further interest rate increases to bring Japan's policy rate closer to what is considered a neutral level for the economy.
Markets Watch Fed and Global Risks
With expectations for tighter U.S. monetary policy rising and geopolitical risks lingering, investors are expected to remain focused on incoming economic data and signals from central banks.
For now, the combination of market volatility, strong U.S. economic performance and growing rate-hike expectations continues to support the dollar, reinforcing its position as the dominant safe-haven currency in global financial markets.