Dollar zooms on bets US can absorb higher rates
TLT•The dollar rose to a 19-month high, with the dollar index reaching its highest level since last year’s tariff shock, as investors bet the US economy can withstand higher rates. Two-year yield spreads widened by as much as 15 basis points against euro zone and Japanese benchmarks after a US inflation report.
1. Dollar gains after inflation data
The dollar surged after US inflation data renewed expectations that the Federal Reserve may need to keep rates higher. The dollar index posted its biggest two-day rise in five months and reached its highest level since last year’s tariff shock; the dollar also rose to 19-month highs against the euro and two-month highs against the yen.
2. Rate expectations diverge
Markets priced a 12% chance of the half-percentage-point hike suggested by Fed Governor Christopher Waller, while adding a quarter point to expected rates over the year ahead. Two-year yield spreads widened by up to 15 basis points against euro zone and Japanese benchmarks. Annualized US core CPI and core PCE inflation were running well above 3%, compared with just above 2% for euro zone and Japanese measures.
3. Productivity outlook debated
Currency strategists cited US productivity growth as a potential support for the economy’s ability to absorb tighter policy, while JPMorgan economist Joseph Lupton questioned how sustainable the recent productivity pickup is and how much AI has contributed. He said investment before returns arrive can raise resource pressures, marginal costs and the neutral interest rate.
