The U.S. dollar extended its gaining streak on Wednesday after new economic data indicated that the economy was still resilient despite the Federal Reserve's rate hiking campaign.
The DXY, an index that tracks the dollar's performance against six peer currencies, reached 103.91, the highest level in over two months. The index also gained in the previous forex trading session, hitting the 103.65 mark. Against the dollar, the euro lost 0.17 percent to trade at $1.0752.
Meanwhile, sterling fell to a five-week low of $1.2358 against the U.S. currency after new data showed that inflation in the U.K. fell at a slower rate than anticipated. The British currency also posted a 0.26 percent drop to 1.1495 against the euro.
Sterling previously rallied on expectations that the Bank of England would maintain high-interest rates for longer. Analysts, however, say the dynamic between sterling's value and interest rate expectations is now showing signs of a reversal.
The dollar traded 0.36 percent higher over the Swedish crown at 0.9049 after gaining 0.99 percent earlier in the session. The Swedish currency also breached 11.544 crowns per euro, its weakest against the euro since March 2009.
Analysts said high core inflation in the eurozone's services sector negatively affected the crown's peg against the dollar. The market now expects the European Central Bank to raise its key rates in June and July.
New Zealand's dollar fell 2.3 percent against the U.S. dollar to $0.61040 after the country's central bank indicated it would conclude its tightening campaign. The Reserve Bank of New Zealand recently hiked its cash rate by 25 basis points to 5.50 percent, the highest in over 14 years.
Bannockburn Global Forex chief market strategist Marc Chandler said the debt ceiling standoff in the Capitol did not have a significant impact on the forex market.
"The U.S. dollar has been rallying more or less for three weeks helped by stronger-than-expected data and rising U.S. interest rates."
Marc Chandler, Bannockburn Global Forex chief market strategist
The Atlanta Fed forecasts that the U.S. economy will grow by 2.9 percent in the year's second quarter, revising its earlier projection of a 2.6 percent growth. Chandler said incoming economic data could further support the dollar's rally if they signaled resilience in the U.S. economy.
According to analysts, signs of economic resilience in the U.S. will prompt the Fed to maintain its hawkish monetary policy. The U.S. central bank began raising the country's benchmark rate in March last year to manage inflation. Currently, the benchmark rate is in the range of 5.00 to 5.25 percent.
Fed officials have also made hawkish remarks in recent weeks. Fed governor Christopher Waller said he was concerned by the "lack of progress" in the central bank's efforts to tame inflation. St. Louis Fed President James Bullard also said last week that further hikes were an "insurance policy" against the country's high inflation rate.
Possible upcoming recession
Analysts have cautioned that the Fed's aggressive policy can push the U.S. into a recession, with many forecasting a recession within this year. According to analysts, the impending recession in the U.S. will not be as severe as previously thought, but it will still adversely affect risk markets, like the stock market.
Recent reports showed that stock ownership had touched 61 percent of American households, around the same rate as before the major economic crisis in 2008. Market experts have warned investors not to be "buoyed" by the stock market's rally at the beginning of this year.