Dollar Near 2-Month High

The dollar index strengthened further to 99.4 on Wednesday, reaching the highest level in about two months, after the ADP report showed that the private sector added 122K jobs in May, exceeding expectations and marking a new high since January 2025. The data pointed to a labor market that continues to gain momentum, reinforcing expectations that the Fed could raise interest rates later this year. Earlier this week, JOLTS data showed that job openings in April rose to their highest level since November 2024, further highlighting the resilience of labor demand. The greenback was already drawing support from escalating tensions in the Middle East, which lifted oil prices for a third consecutive session and heightened concerns over inflationary pressures. Markets now price in an 85% probability of a quarter-point Federal Reserve rate hike by year-end, up from 60% a week ago.

The dollar index hovered around 99.2 on Wednesday, maintaining gains from earlier in the week as stalled US-Iran peace negotiations and renewed tensions in the Middle East continued to underpin safe-haven demand. According to the US Central Command, Iran launched ballistic missiles toward neighboring countries, while US forces carried out strikes on Qeshm Island in response to attempted attacks by Tehran. The ongoing conflict has kept energy prices elevated, fueling concerns about inflation and reinforcing expectations that interest rates could remain higher for longer. Supporting that view, data released on Tuesday showed US job openings surged in April to their highest level in nearly two years, while layoffs declined. Investors are now awaiting the release of private payrolls data later on Wednesday, with attention also turning to Friday’s closely watched nonfarm payrolls report for further insight into the Federal Reserve’s policy outlook.

The dollar index was flat to lower around 99.1 on Tuesday, helped by a modest retreat in oil prices, although sentiment remained sensitive to developments in the Middle East. US President Trump said Israel and Hezbollah had agreed to halt attacks against each other in Lebanon and that discussions with Iran were ongoing. On Monday, borrowing costs had risen after Iran’s Tasnim news agency reported that Iranian negotiators were pausing talks with the US following Israeli strikes in Lebanon, with Tehran also reportedly considering a full closure of the Strait of Hormuz. Investors are now awaiting key labour market data later this week, including the US jobs report, which is expected to help shape expectations for Federal Reserve policy under the new chair, Kevin Warsh. Traders are currently pricing in around 17 basis points of rate hikes by year-end, implying roughly a 70% probability of a 25bps increase, with a full hike priced in by March 2027.