The US Dollar (USD) extended its rally on Friday, reaching its highest level since early April and posting its largest weekly gain in two months, as markets sharply repriced expectations for Federal Reserve (Fed) policy tightening following stronger-than-expected US inflation data and robust economic indicators [1][2][4]. The USD Index (DXY) climbed to 99.10–99.20, up 1.3% for the week and 0.3% on the day, reflecting broad-based strength against major currencies [1][2][4].
The surge in the USD was fueled by a combination of factors: US headline Consumer Price Index (CPI) rose 3.8% year-on-year, the strongest growth in nearly three years [2], and US Retail Sales increased by 0.5% in April, matching analyst estimates [4]. These data points, alongside a rise in US Treasury yields—with the 10-year yield hitting a near one-year high above 4.5% [2][4]—prompted traders to price out dovish Fed bets. According to the CME FedWatch Tool, there is now a nearly 40% chance of a Fed rate hike by year-end [1], with other sources citing about a 50% probability of at least one hike by end-2026 [4], and 51.1% odds of rates being held steady through year-end [2].
Currency markets responded with sharp moves: the Australian Dollar (AUD) fell to a one-week low near 0.7160, down 0.85% on the day and 0.86% for the week against the USD [1][2][4]. The Euro (EUR) dropped to a monthly low around 1.1630, losing 0.32% on the day and 0.97–0.98% for the week versus the USD [1][2][4]. The British Pound (GBP) was the weakest major, falling 1.46–1.53% against the USD this week [1][4]. The New Zealand Dollar (NZD) also underperformed, with the USD gaining 1.00% on the day and 1.40–1.48% for the week [2][4].
Market sentiment was risk-averse, as reflected in US stock index futures declining between 0.4% and 1% on the day [4]. Geopolitical developments added to the USD's safe-haven appeal: US-Iran peace talks remained stalled, and President Trump warned of limited patience with Tehran [1]. Meanwhile, positive headlines from a summit between President Trump and Chinese President Xi Jinping, including agreements on trade and the Strait of Hormuz, provided some support to risk sentiment but did little to stem the USD rally or support China-proxy currencies like the AUD [1][4].
Looking ahead, the fundamental backdrop suggests potential for further USD strength, with the breakdown of key technical levels in AUD/USD and EUR/USD supporting the case for extended retracement [1][2]. However, the Reserve Bank of Australia's hawkish stance and expectations for a European Central Bank (ECB) rate hike in June could offer some counterbalance [1][2].
CONCLUSION
The US Dollar's rally was driven by hotter-than-expected inflation, strong economic data, and a hawkish shift in Fed expectations, resulting in significant declines for the AUD, EUR, GBP, and NZD. Market sentiment remains risk-averse, with geopolitical tensions and robust US yields reinforcing the USD's safe-haven status. Unless inflation cools or Fed rhetoric shifts, the USD is likely to remain well-supported in the near term.