The dollar is having its strongest week since 2022 as investors back off their bets on interest rate cuts

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The dollar recorded its strongest weekly performance since 2022 after higher-than-expected US inflation numbers caused tremors in global markets.

The US currency has strengthened 1.7 percent against a basket of six currencies since Monday, its best weekly performance since September 2022, as traders retreated from their bets on early interest rate cuts by the Federal Reserve.

The euro and pound fell to their weakest levels against the dollar since November on Friday at $1.0642 and $1.245, respectively, while the yen fell to a 34-year low, before recovering to 153.28 yen.

The decline in sterling also contributed to a rise in British stocks by 0.9 percent on Friday, as the FTSE 100 index, whose constituent companies withdraw most of their revenues in dollars, ended the day’s trading a short distance from the record closing level.

“The US is its own case with very loose fiscal policy, and now tight monetary policy, which is a recipe for a stronger dollar,” said Quentin Fitzsimmons, a senior portfolio manager at T. Rowe Price. “The buzzword going through the markets right now is differentiation.”

This week's increase in US consumer price inflation – which hit a higher-than-expected 3.5 percent for March – has traders raising bets that the Federal Reserve may cut interest rates slightly this year.

This compares with expectations of up to six quarter-point cuts at the start of January.

The European Central Bank indicated on Thursday that it remains on track to make interest rate cuts in June. Pressure on the euro increased due to growing expectations that interest rates in the euro zone will fall before their counterparts in the United States.

As of Friday afternoon, the single currency had fallen 1.8 percent during the week, the largest weekly decline since September 2022.

“A happily mixed ECB appears to have pulled the euro lower against the dollar,” said Chris Turner, head of global markets at ING.

The shift in sentiment helped push the spread – or gap – between US and German government benchmark 10-year borrowing costs to 2.17 percentage points, its highest level since 2019.

Speculation also rose that the Riksbank may cut interest rates as soon as May after the country reported lower-than-expected inflation on Friday.

Analysts say fears of an imminent attack by Iran on Israel, in response to an airstrike on the Islamic Republic's consulate in Syria, may also have contributed to the dollar's recent strong rise.

“Rising tensions between Iran and Israel could lead to higher oil prices, all to the benefit of the dollar in the near term,” said Francesco Besol, currency analyst at ING.

The dollar is considered a safe haven asset for investors during times of heightened geopolitical uncertainty.

Continued dollar strength could cause problems for countries seeking to lower interest rates without undermining their currencies and accelerating higher prices.

The outlook was complicated by rising oil prices, with the price of Brent crude surpassing $92 a barrel for the first time since October on Friday amid growing concerns about the expanding conflict in the Middle East.

“Clearly other central banks don't want their currencies to weaken materially… What that means is that you will actually end up importing more inflation,” said James Novotny, portfolio manager at Jupiter Asset Management.

Markets are betting that the ECB will deliver at least three quarter-point cuts by the end of the year, compared to two cuts for the Bank of England and just one or two cuts for the Fed.

The Japanese currency was most affected by rising US interest rate expectations, which pushed the yen to its lowest level since 1990, putting the Finance Ministry on red alert for possible intervention.

Masato Kanda, Japan's deputy finance minister for international affairs, told reporters on Thursday that authorities would not rule out taking any measures to address excessive movements in the exchange rate.

The impact of any intervention would be costly and temporary, said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.

“The yen has been undermined by politics [Bank of Japan]“It is very convenient,” he said. “The yen appears to remain vulnerable simply because the policy gap remains painfully wide.”