The interest rate market has already factored in expectations of the Fed raising interest rates, causing the US dollar to reach its highest level since November last year.

As market expectations for a rate hike by the Federal Reserve within the year continue to strengthen, the US dollar continued to rise on Tuesday, reaching its highest level since November last year. Analysts believe that the increasing policy divergence between the Federal Reserve and other major central banks worldwide is providing support for the US dollar. Data shows that the Bloomberg Dollar Spot Index, which measures the performance of the US dollar against a basket of major currencies, rose by 0.36% on Tuesday. Currently, the interest rate market has largely absorbed expectations for the Federal Reserve to continue tightening its monetary policy in the future. Traders expect that by early 2027, the Federal Reserve will have raised interest rates cumulatively by close to 50 basis points, equivalent to two 25 basis point rate hikes. Jordan Rochester, a strategist at Nomura International, stated that there is still room for further appreciation of the US dollar. Rochester said, "The US dollar tends to strengthen ahead of the Federal Reserve's rate hike cycle, and the market is currently seriously considering the possibility of the Federal Reserve starting a new rate hike cycle as early as September." Since the Federal Reserve's interest rate meeting last week, there has been a significant change in market expectations regarding the outlook for monetary policy. Newly appointed Federal Reserve Chairman Powell signaled a hawkish stance at the first interest rate meeting, emphasizing that the Federal Reserve will continue to prioritize controlling inflation. At the same time, the Federal Reserve's latest interest rate forecast shows that several officials expect further rate hikes to be necessary this year. This has led to a significant increase in market expectations for the future interest rate path and has driven the US dollar to continue strengthening. In contrast, other major central banks have released relatively mild policy signals. In Europe, following recent remarks by European Central Bank President Lagarde, the market has lowered bets on further rate hikes by the European Central Bank. As a result, the euro fell to its lowest level in a year on Tuesday. In Japan, despite the Bank of Japan having initiated rate hikes earlier, the market generally believes that its policy tightening pace is still insufficient to stem the ongoing depreciation of the yen. As a result, the yen continues to be under pressure, and concerns among traders about the Japanese government possibly intervening in the foreign exchange market again have increased. The Bloomberg Dollar Spot Index has risen by approximately 1.7% so far this year. The strong performance of the US dollar this year is mainly driven by two factors: increased safe-haven demand and the market's continued strengthening expectations for US rates to remain high for a longer period. Previously, the US and Israel took military action against Iran at the end of February this year, leading to a sharp increase in international oil prices and driving funds towards safe-haven assets such as the US dollar. Although there has been some relief in energy prices after the recent temporary agreement between the US and Iran, the market broadly believes that the inflationary effects formed during the war will not quickly dissipate. With energy, transportation, and some commodity prices still relatively high, investors are starting to believe that the Federal Reserve may need to further hike interest rates to prevent a resurgence of inflation. Against the backdrop of continued policy divergence among major central banks, relatively strong US economic performance, and the growing expectations for rate hikes by the Federal Reserve, the US dollar is likely to maintain its strong performance in the short term. However, future trends will still depend on US inflation data, Federal Reserve policy signals, and changes in the global economic growth outlook.