Dollar hits 13-month high; rate-hike bets, tech rout fuel demand

The dollar climbed to a 13-month high on Monday, supported by rising expectations for further Federal Reserve rate increases and a selloff in technology stocks that drove investors into safe-haven assets. The move extended a rally that began after a string of U.S. data pointed to persistent inflation and a resilient labor market, pushing traders to price in a peak fed funds rate above 5.5%.

Two-year Treasury yields rose above 5.1% for the first time since March, widening the dollar’s yield advantage over the euro and the yen. The rate differential pulled the Bloomberg Dollar Spot Index to levels last seen in late 2022.

The tech-heavy Nasdaq fell more than 2%, deepening a sector rotation out of growth stocks. The equity rout amplified demand for the greenback as the default hedge in a risk-off move. The S&P 500 also dropped, with losses concentrated in technology and consumer discretionary names.

Currency markets felt the pressure across the board. The euro slipped below $1.07 for the first time since May, undercut by the widening rate gap and a separate report showing weaker euro-area economic sentiment. Sterling fell to a two-month low. The yen weakened past 145 per dollar, keeping traders watchful for potential intervention from Japanese authorities -- officials have previously stepped in when the pair approached that level.

Emerging-market currencies took a harder hit. The Indian rupee fell to a record low, extending losses that had already mounted after the central bank’s intervention and a hawkish rate comment last week. South Korea’s won and Indonesia’s rupiah also weakened. A stronger dollar tightens financial conditions in countries that rely on dollar-denominated debt.

Commodities priced in dollars moved lower. Gold declined about 1% to near $1,960 an ounce, retreating from a recent rally. Brent crude dropped below $78 a barrel as the stronger dollar and concern over Chinese demand weighed. Higher yields also reduced the appeal of non-yielding assets like bullion.

The dollar’s trajectory now depends on the next set of U.S. inflation data, due Wednesday at 8:30 a.m. ET. The consumer price index will either reinforce the case for keeping rates higher for longer or offer relief if price pressures moderate. A print above consensus could push the dollar even higher. A softer number might trigger a sharp pullback in the currency and a bounce in risk assets. Traders are positioning for large moves in both directions.