The US dollar rallied sharply this week after higher-than-expected inflation data reduced the likelihood of Federal Reserve interest rate cuts in 2026, creating headwinds for risk assets including cryptocurrencies. The Dollar Index (DXY) hit a five-week high of 99.20 and was on track for its strongest weekly gain in two months, up about 1.30%.
Data released on 12 May showed annual headline inflation rose to 3.8% against a consensus of 3.6%, while the core figure also beat expectations at 2.8%. The strong print, driven partly by the highest annual increase in energy costs since 2022, led traders to price out a Fed cut this year. According to CME FedWatch, 66% of participants now expect the funds rate to stay at 3.50–3.75% through December, and the probability of at least one hike by year-end climbed to around 32%.
Support for the dollar was reinforced by resilient US retail sales and further stabilization in weekly jobless claims, signaling a still-firm labour market. US Treasury yields surged to one-year highs, making dollar-denominated assets more attractive. Meanwhile, geopolitical tensions remained elevated: US-Iran talks mediated by Pakistan showed little progress, the Strait of Hormuz stayed closed, and oil hovered near $100 per barrel. President Trump, after meetings with Xi Jinping in Beijing, expressed impatience with Iran while pursuing trade concessions for US businesses.
The macro backdrop weighed on major risk markets. Euro-dollar slipped back to $1.17, and cable came under heavy pressure as British political instability sent 10-year gilt yields briefly to 5.1%, their highest since 2008. For crypto, the combination of a stronger dollar, rising yields, and geopolitical uncertainty typically creates a risk-off environment, draining liquidity from digital assets and capping upside momentum.
