The US dollar index has reached its highest level in 13 months.
Bolstered by rising expectations for a Federal Reserve interest rate hike and a flight to safety amid a sell-off in technology stocks, the US dollar has continued to strengthen against a basket of major currencies. The dollar index hit a 13-month high on Wednesday. Concurrently, international gold prices experienced a sharp decline, with the COMEX gold futures contract for June delivery tumbling over 3% to breach the critical $4,000 per ounce level, potentially facing further downward pressure in the near term.
Dollar Demand Intensifies
The resilience of the US economic fundamentals, coupled with uniformly hawkish commentary from Federal Reserve officials, has fueled market expectations for further rate increases. Simultaneously, a broad sell-off in the technology and semiconductor sectors triggered significant stock market volatility, driving capital into the US dollar and Treasury bonds as safe-haven assets. The dollar index, which measures the currency against six major peers, climbed to 101.71, marking its highest point since May 2025, with a daily gain of 0.3%.
"The US dollar remains the market's preferred safe-haven currency," stated Ray Attrill, Head of FX Strategy at National Australia Bank. "The current uptrend for the dollar is robust, though the market has already priced in a substantial amount of positive expectations at this stage."
According to data from the CME FedWatch Tool, market-implied probabilities for a Fed rate hike at the July meeting have risen to 35%, up from just 9% a week ago. The probability for a September hike has surged from 29% to 70%.
Weighed down by the stronger dollar, the euro fell 0.35% against the US dollar to 1.134, reaching a more than one-year low. Investors have scaled back expectations for further European Central Bank rate hikes this year. The euro has depreciated over 2.5% since June, potentially on track for its worst monthly performance since July of last year. Lee Hardman, Senior Currency Analyst at MUFG, explained, "The persistent weakness in EUR/USD is fundamentally driven by a significant divergence in market expectations for monetary policy from the ECB and the Fed. The US interest rate market is now pricing in multiple Fed hikes, while the eurozone market increasingly questions the necessity for the ECB to continue raising rates."
Meanwhile, the British pound fell 0.35% against the dollar to 1.3149, hitting a fresh seven-month low. The risk-sensitive Australian dollar also declined 0.35% to 0.6885, its lowest level since early April, as mixed inflation data from the country clouded market expectations for the Reserve Bank of Australia's next policy move.
The US dollar traded at 161.66 against the Japanese yen, with the yen showing little ability to rebound against the strong greenback. If the exchange rate surpasses 161.96, the yen would weaken to its lowest level since 1986. Japanese officials issued verbal intervention warnings this week, but with limited effect, as pressure on the yen remains unabated. The Japanese government is reportedly planning to optimize its $1.3 trillion foreign exchange reserves for potential market intervention. The latest minutes from the Bank of Japan's policy meeting revealed the central bank has raised its policy rate to 1%, a 31-year high. Committee members discussed upside risks to inflation, with some officials calling for a faster pace of rate hikes to bring interest rates closer to a neutral level for the economy.
Gold's Downturn Persists
On Wednesday, both gold futures and spot gold prices fell below the key psychological level of $4,000 per ounce for the first time since November 2025.
Gold, as a non-yielding asset, typically faces sustained pressure in a rising interest rate environment. The epic bull run for gold in 2025 was primarily driven by market bets on Fed rate cuts within the year, with spot gold hitting an all-time high of $5,594.82 per ounce in January. However, the Iran conflict pushed energy prices higher, reigniting inflation concerns and prompting a collective hawkish pivot by the Fed and other global central banks. Investor trading logic has completely reversed, with markets now increasing bets on rate hikes and abandoning expectations for cuts. Consequently, gold prices have been on a sustained decline, falling approximately 29% from their January peak.
Data from the World Gold Council shows that global gold ETFs experienced net redemptions of 16 tonnes in May, with the outflow trend continuing into early June. However, last week saw the largest weekly net inflow into gold ETFs since mid-April, suggesting the pace of outflows may be moderating. Carsten Menke, an analyst at Julius Baer, noted, "Gold ETF flows are highly correlated with US monetary policy. The buying and selling behavior of physical gold ETFs directly reflects market expectations for interest rates."
ING stated in commentary, "Despite recent episodic inflows and some marginal easing of selling pressure, demand for allocation to gold ETFs is unlikely to recover to the robust levels seen in 2025."
Standard Chartered pointed out in a research report that, at current gold prices, over 200 tonnes of holdings in global gold ETFs are now in a loss-making position.
"The market's upward revision of interest rate expectations, combined with massive capital absorption from AI sector financing, has fostered a generally bullish view on the US and global economy," said Adrian Ash, Research Director at BullionVault. "This doesn't necessarily mean gold prices will keep falling, but it's clear that market attention has shifted for now."
Several major investment banks maintain a long-term bullish view on gold but note that weak ETF demand has become a core constraint on price appreciation. Morgan Stanley indicated that its year-end 2026 gold price target of $5,200 per ounce is highly dependent on two conditions: a resumption of large-scale buying by gold ETFs and a decline in oil prices that rekindles market expectations for rate cuts. Goldman Sachs has similarly lowered its year-end gold price forecast and significantly revised down its expectations for gold ETF inflows, marking a clear cooling of its bullish stance.
Analysts suggest that while weak short-term ETF demand weighs on prices, continued central bank gold purchases—a core pillar of last year's bull market—will still provide a fundamental buffer for gold. Suki Cooper, an analyst at Standard Chartered, stated, "If global central banks continue to rapidly increase their gold holdings, it could be sufficient to offset the negative impact from gold ETF outflows."
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