Dollar Rises for Fourth Day as Inflation Data Lifts December Rate-Hike Odds to 35%

The dollar climbed for a fourth straight session on Thursday, lifting the DXY index to 98.57, after back-to-back US inflation prints — the hottest readings in years — forced a sharp repricing of Federal Reserve rate expectations and pushed the implied odds of a December rate increase to 35 per cent.

The index is up 0.7 per cent on the week, its best showing since the Iran conflict flared, and the run has wrong-footed short-dollar positions that built up during the Fed’s easing cycle. The trigger was the data. US producer prices rose 6.0 per cent year on year in April, the fastest pace in four years; consumer prices accelerated to a three-year high. Both prints overshot consensus by margins wide enough to force a recalibration across the rates complex.

Futures now imply a 35 per cent probability that the Federal Open Market Committee lifts the federal funds rate at its December meeting, according to LSEG data, up from roughly 16 per cent a week ago. The near-20-point swing is one of the swiftest repricings of the US rates outlook since the central bank’s easing cycle began. Traders said the move gathered pace after Wednesday’s PPI release blew past the top end of the analyst range.

The data landed just as the Senate confirmed Kevin Warsh as the new Fed chair on 13 May. Some market participants view Warsh as more willing than his predecessor to act on price pressures. The former Fed governor, who served under Ben Bernanke, has long argued that central banks lose credibility when they let inflation drift above target for too long — a stance that has drawn fresh attention after the April readings challenged the steady-disinflation narrative.

“The inflation data we received this week certainly won’t be welcomed by FOMC officials, including incoming Fed Chair Kevin Warsh,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Kong told clients that CBA now forecasts the FOMC will begin a tightening cycle from December, with three 25-basis-point increases pencilled in over the cycle. The call sits well outside the consensus, and if delivered would unwind about half the easing of the past 18 months.

How the crosses traded

The euro slipped 0.1 per cent to $1.1701, leaving the single currency on course for a 0.6 per cent weekly loss, its largest in two months. The widening rate differential with the US has become the dominant driver of the pair, traders said, as the European Central Bank holds to its easing bias while US rate expectations turn higher. Two-year US Treasury yields touched their highest since February, taking the transatlantic spread to levels not seen since late 2024.

Sterling fared little better, shedding 0.2 per cent to $1.2734, while the dollar edged up to 154.82 against the yen. The bid was broad-based — it gained against every G10 peer — which traders read as a rates story rather than something idiosyncratic to any single cross.

Trump and Xi meet in Beijing

A second layer of support came from safe-haven flows as President Donald Trump began a high-stakes summit with Chinese President Xi Jinping in Beijing. The talks, which opened with a formal welcoming ceremony on Thursday morning local time, are expected to cover trade, Taiwan, artificial-intelligence governance, Iran sanctions and rare-earth supply chains. One former US official described the agenda as the most consequential bilateral engagement in years.

“Although expectations are low and no grand bargain is likely, the welcoming ceremony and initial remarks at the opening session highlight how truly consequential this relationship is for the world,” said Scott Kennedy, a senior adviser at the Center for Strategic and International Studies.

The offshore yuan strengthened for an eighth straight session, reaching 6.7844 per dollar, a three-year high. The move cut against the broader dollar bid and puzzled some traders, since a confrontational summit would normally weigh on the Chinese currency. Several analysts pointed to evidence of state-bank dollar selling in the onshore market, suggesting Beijing may be leaning against depreciation as a goodwill signal. Others cautioned that the move could prove temporary if the talks produce no concrete deliverables.

What comes next

The dollar’s near-term path now hangs on whether the April inflation data marks the start of a reacceleration or a one-off overshoot driven by seasonal and tariff-related noise. Several Fed regional bank presidents are due to speak in the coming days, and markets will parse their language for any sign that the FOMC’s reaction function has shifted. Particular attention will fall on whether Warsh chooses to make public remarks early in his tenure. A signal, or the absence of one, could set the tone for the dollar into the northern summer.

On the geopolitical side, a joint communiqué from the Trump-Xi summit that points to even modest progress on trade or supply-chain cooperation could take the edge off safe-haven demand and trim recent dollar gains. A breakdown, by contrast, would almost certainly send the greenback toward the 99 handle, a level not seen since the early weeks of the Iran crisis.