Dollar climbs 0.3% as inflation risks force Fed rate cut reassessment

The dollar extended its advance Monday, pushing the DXY to a fresh multi-week high, as resilient U.S. economic data and rising inflation expectations forced traders to unwind bets on aggressive Federal Reserve rate cuts this year.

"The market is pricing out the easing that seemed locked in just weeks ago — the data simply doesn't support it," said James Okafor, macro analyst at Edgen. "Every strong print pushes the first cut further into 2027."

The DXY rose 0.3% to 104.85, its highest since early June, while the 10-year Treasury yield climbed 1 basis point to 4.551%. EUR/USD slipped 0.02% to 1.1437, and GBP/USD edged 0.08% higher to 1.3464, though both remain under pressure as rate differentials widen in favor of the dollar. Brent crude added 2.8% to $90.57 a barrel, adding to inflation concerns.

The repricing carries significant implications for risk assets. A stronger dollar and higher bond yields typically tighten financial conditions, weighing on equities and emerging-market currencies. The next test comes with the July 31 Federal Open Market Committee meeting, where updated economic projections will signal whether the hawkish repricing has official backing.

The shift in rate expectations has been abrupt. As recently as late June, overnight-indexed swaps priced a cumulative 75 basis points of Fed cuts through year-end. That has now narrowed to roughly 50 basis points, with the probability of a September cut falling below 40 percent, according to CME FedWatch data.

The dollar's strength is compounding headwinds for the euro and sterling. EUR/USD has shed 1.2 percent over the past two weeks, breaking below its 50-day moving average, as the European Central Bank's own easing cycle — it delivered a quarter-point cut in June — narrows the rate advantage over the Fed. The Bank of England faces a similar dynamic: markets price a first cut in August, but sticky services inflation in the U.K. complicates the timeline.

Oil Adds to the Inflation Calculus

Rising energy costs are amplifying the dollar bid. Brent crude's rally to $90.57 — up 2.8 percent on the day and 12 percent over the past month — threatens to feed through to headline inflation readings, giving the Fed further reason to hold fire. The last time oil traded above $90 for a sustained period, in the first half of 2025, core PCE inflation remained above 3 percent for three consecutive months.

The cross-asset transmission is already visible. Asian equities tumbled Monday, with Japan's Nikkei 225 plunging 4 percent to 64,141, its worst session in months, as a stronger yen compounded the dollar-driven selloff. Hong Kong's Hang Seng Index bucked the trend, rising 1.9 percent to 25,033, supported by Chinese state-investor buying.

What Comes Next

The immediate focus is on the July 31 FOMC decision. While no rate change is expected — the fed funds rate stands at 4.50-4.75 percent after the 25-basis-point cut in March — the statement and Chair Jerome Powell's press conference will be scrutinized for any shift in the inflation assessment. A more cautious tone on price pressures would validate the dollar's recent gains and could push EUR/USD toward the 1.13 handle, a level not seen since April.

For sterling, the path depends as much on domestic data as on Fed policy. U.K. inflation figures due Wednesday will shape expectations for the BoE's August meeting. A hot print would support GBP/USD near current levels; a miss could send it below 1.34 for the first time since February.

This article is for informational purposes only and does not constitute investment advice.