A big drop in the Japanese yen boosted the US dollar to a 13-month high ahead of widely expected Federal Reserve rate hikes.

The Japanese yen fell to its lowest level against the US dollar since 1986 early Tuesday morning, reaching 161.95, its post-1986 high. That assisted the dollar, which traded near its 13-month high of 101.80 set Wednesday.

As the yen fell and rate-hike bets rose, the US Dollar Index (DX-Y.NYB) has returned 3.1% year to date, with two-thirds of that rally occurring in the past month.

Despite raising rates to 1% from 0.75% in June, Japanese target rates remain much below those of other industrialized nations, pushing investors to trade yen for the US dollar in quest of a greater return.

Bets of a Federal Reserve interest rate hike are also boosting the dollar. As expected, the Fed held the US target rate at 3.5% to 3.75% in Kevin Warsh’s first meeting as chairman earlier this month.

A months-long trend of inflation data beyond forecasts and stubbornly over the Fed’s 2% objective has driven those bets. Last week, the Federal Reserve’s favored inflation gauge, the Personal Consumption Expenditures (PCE) index, showed “core” inflation at its highest level since October 2023 in May.

Due to higher yields on dollar-denominated assets like Treasury bonds, higher interest rates boost the dollar and attract international capital. Dollar demand grows with asset demand, pushing the currency higher.