The U.S. dollar climbed against major currencies as investors reassessed the likelihood and pace of Federal Reserve rate cuts. The U.S. Dollar Index (DXY), which tracks the greenback against a basket of peers, moved higher as recent economic data pointed to persistent inflationary pressures and steady labor market conditions. The shift reflects growing skepticism that the Fed will deliver the number of cuts previously priced into futures markets.

Interest Rate Expectations Repriced

Market-implied probabilities derived from Fed funds futures indicate a reduction in expectations for multiple rate cuts this year. Recent U.S. inflation readings have remained above the Fed’s 2% target, while employment data continues to show resilience. As a result, Treasury yields have firmed, particularly in the two- and five-year maturities, supporting the dollar through higher relative returns.

For global investors, interest rate differentials remain a key driver of currency valuations. A slower pace of U.S. monetary easing relative to the European Central Bank or other major central banks strengthens the dollar’s appeal in carry trades and fixed-income allocations.

Impact on Global and Israeli Markets

A stronger dollar has broad implications across asset classes. Emerging market currencies have faced renewed pressure, while commodity prices—often denominated in dollars—have shown increased volatility. For Israeli investors, dollar appreciation directly influences the USD/ILS exchange rate, affecting import costs, corporate earnings with overseas exposure, and hedging strategies.

The Bank of Israel’s policy path may also be indirectly affected by global rate dynamics. Diverging interest-rate trajectories between Israel and the U.S. can create capital flow pressures, particularly in periods of geopolitical sensitivity.

Equities and Risk Sentiment

Equity markets have shown mixed reactions. While financial stocks may benefit from sustained higher rates, growth-oriented sectors sensitive to discount rates have experienced modest pressure. Technology and high-multiple stocks tend to react quickly to shifts in yield expectations, reinforcing cross-asset volatility.

Looking ahead, investors will closely monitor upcoming U.S. inflation data, labor market reports, and Federal Reserve communications. Any confirmation that inflation remains sticky could further support the dollar, while clearer signs of economic cooling may revive rate-cut expectations. In the near term, currency markets appear positioned for policy caution rather than rapid easing.