The U.S. dollar hit its highest level against a basket of currencies in four weeks. Investors reacted to the surprising May inflation data, which climbed to 8.6 percent year-on-year in the US.
Dollar index rose quickly
The dollar index rose 0.8 percent to 104.16, the highest since May 17. In a single week, the dollar index is up two percent, its best weekly performance in six weeks. The US currency appreciated against virtually all currencies represented in the basket against which the dollar is measured. The British pound even lost 1.5 percent against the dollar.
Accelerating inflation in the US
Ironically, the strengthening dollar is the result of the announcement of May inflation data, which unexpectedly accelerated to 8.6 percent in the US. This is the highest annual price increase the United States has seen in 40 years. Investors are thus expecting a much tougher response from the Federal Reserve in the form of interest rate hikes, and are already betting that the US dollar will continue to strengthen. Thus, it has already partially strengthened now, as demand for the dollar from investors is growing.