Dollar climbs to 13-month high on Fed hike bets, safe-haven bid

By Chuck Mikolajczak

NEW YORK, June 23 (Reuters) - The U.S. dollar ascended to its highest level in more than a year on Tuesday as markets adjusted expectations for a more hawkish stance from the Federal Reserve, while a selloff in megacap stocks also buttressed the greenback.

The Fed's policy meeting last week, the first under new Chairman Kevin Warsh, was largely seen as hawkish by market participants, prompting a greater shift towards expectations of rate hikes this year from the central bank, even as oil prices have ebbed and cooled some inflation concerns.

Expectations for a hike from the Fed of at least 25 basis points at its July meeting are at 36.3%, up from 8.5% a week ago, according to CME FedWatch, while markets are pricing in a 69.1% chance of a hike at the September meeting, up from 29.1% a week earlier.

"The dollar's strength right now, at the end of the day, it's still hawkishness, if you look at Fed expectations with Fed funds futures right now, they are some of the highest odds that we've seen in a while," said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut.

"At the end of the day, you have to boil it down to rates, and the rates markets are expecting much more hawkishness in the near term than they had been before, and the entire market is adjusting to it. Equities are adjusting to it, gold is adjusting to it, the dollar is adjusting to it."

EQUITY SELLOFF BOOSTS DOLLAR

The S&P 500 and Nasdaq both tumbled on Tuesday, weighed down in large part by technology stocks.

The dollar index, which measures the greenback against a basket of currencies, rose 0.38% to 101.39 after hitting its highest since May 2025 at 101.42, with the euro down 0.41% at $1.138 after hitting $1.1374, its lowest since June 2025.

Kit Juckes, chief FX strategist at Societe Generale, said in a note that rate differentials could be enough to push the euro through $1.14 as "for once, the U.S. has both a stronger economy than the euro zone and a rates market that prices in more Fed tightening than ECB tightening in the coming months."

Chicago Federal Reserve President Austan Goolsbee said late on Monday that with the labor market stable, he is focused on figuring out whether too-high inflation will stay that way or if it will recede as the effect of high tariffs fades and if the conflict in the Middle East gets resolved.

Investors will get another look at inflation pressures this week in the form of the U.S. Personal Consumption Expenditures Price Index for May on Thursday.

Euro zone inflation could stay above the European Central Bank's 2% target for some time, even if peace in the Middle East holds, but this shock still only requires a measured policy response, ECB Chief Economist Philip Lane said.

Sterling weakened 0.45% to $1.3187 as the UK government begins its transition following the resignation of Prime Minister Keir Starmer.

Against the Japanese yen, the dollar strengthened 0.01% to 161.55. A break above 161.96 per dollar would take the yen to its weakest level since 1986.

Japanese Finance Minister Satsuki Katayama held an online meeting with U.S. Treasury Secretary Scott Bessent late on Monday, a source told Reuters, as concerns grow over sharp currency swings.

The meeting focused on policy responses to the historically weak yen, potentially including currency intervention.

Japanese financial authorities have kept markets guessing about possible currency intervention, with the lack of clear signals suggesting a shift in communication tactics.

(Reporting by Chuck Mikolajczak; additional reporting by Samuel Indyk in London and Jiaxing Li in Hong Kong; Editing by Lincoln Feast, Jan Harvey and Nia Williams)