The US dollar climbed to its highest level in 19 months on Thursday, as traders stepped up bets that the Federal Reserve will raise interest rates again after hotter-than-expected American inflation data.

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.15% to 103.02, its highest since April 2025, according to Reuters. The index had already stood at 103.08 earlier in the session, holding on to the jump that followed Tuesday's inflation figures.

Inflation data drives rate bets

US consumer prices rose by more than expected in October, the third month in a row that inflation has come in above forecasts. The surprise has forced traders to rethink how soon the Federal Reserve will tighten policy again, after a long stretch in which rate cuts, not rises, were seen as the next move.

According to CME's FedWatch tool, traders have raised the implied chance of a 25-basis-point Federal Reserve rate rise in December to 87%, from about 70% a month ago. Comments from Fed officials have added to the shift: Governor Christopher Waller and Dallas Fed President Lorie Logan have both signalled unease over stubborn inflation and left open the possibility of a larger half-point increase.

Several major brokerages have revised their calls in response. Goldman Sachs now expects rate rises in December and again in March, while Deutsche Bank expects increases in December, January and March, Reuters reported.

Yen edges towards 160 per dollar

The dollar's gains have been sharpest against the Japanese yen. The greenback traded at 159.83 yen on Thursday, after rising 0.69% to 159.84 on Wednesday, its strongest in more than two months and close to the psychologically important 160 level.

The yen has been under pressure from the wide gap between US and Japanese interest rates, and from a dovish speech by a Japanese central banker. Many analysts in a Reuters poll expect the Bank of Japan's next rate rise to come as soon as next month, a step that could slow the yen's slide if it arrives.

The Wall Street Journal's dollar index also hit a new 52-week high, recording its highest closing value since 9 April 2025. Chris Turner, global head of markets at ING, said in a note that the dollar index could soon rise above resistance levels at 102.850 to 103.000, and that the currency was likely to stay firm while the prospect of further Fed rises remained in play.

Sterling under pressure

Sterling has felt the drag from the stronger dollar, trading at about $1.326 on Thursday morning, slightly lower than the previous session's close. The pound's direction later in the day is likely to hinge on the first official estimate of UK growth for the third quarter, due from the Office for National Statistics on Thursday.

Currency traders will also be watching New York Fed President John Williams, who is due to appear on a panel late on Thursday. His remarks will be closely studied, given that he had previously suggested the Fed had time before raising rates.

What to watch next

The dollar's rally now depends on whether the run of hot US data continues and whether Fed officials keep the door open to a bigger December move. A further rise in rate expectations would likely keep the greenback supported, while any sign that the Fed is cooling on a hike could see the gains unwind quickly.

For now, the market's message is clear: after months of expecting lower American rates, traders are pricing in the opposite. This article is for information only and is not financial advice.