Dollar index hits 13-month high on hawkish Fed, Middle East strain

The dollar index climbed to a 13-month high of 101.12 on Friday as hawkish signals from the US Federal Reserve and renewed geopolitical tensions in the Middle East drove investors toward the safe-haven currency, according to market data. The greenback strengthened across the board after the Fed hinted at a potential return to tighter monetary policy while diplomatic efforts to end regional conflicts showed signs of unraveling.

Fed raises rate outlook

The Federal Reserve kept its benchmark interest rate unchanged earlier this week but signaled a more aggressive stance by lifting its year-end federal funds rate projection to 3.8% from 3.4%, according to its policy statement. Fed Chair Kevin Warsh said inflation remained well above the bank's 2% target and stressed the central bank's determination to restore price stability, citing data that showed the Consumer Price Index rose 0.5% month-on-month and 4.2% year-on-year in May — the strongest annual increase since April 2023. Following these developments, money markets began pricing in an 89% probability that policymakers will raise rates by 25 basis points at the September meeting.

Middle East tensions flare

The tentative peace atmosphere in the Middle East came under strain after Israel targeted Lebanon and Iran withdrew from negotiations, undermining diplomatic efforts to secure a lasting ceasefire. The escalation bolstered demand for the dollar as investors sought refuge from uncertainty, with the index climbing to 101.12 during the session.

Major currencies retreat

The euro fell to 1.1418 against the dollar, its lowest level since March 16, before stabilizing around 1.1460 during the session. Sterling dropped to 1.3163, its weakest since March 31, though it later recovered to 1.3229 — up 0.2% from its previous close. The dollar-yen pair, which tested 161.81 on Thursday for the first time since July 10, 2024, traded at 161.29 — down 0.1% on the day.