The U.S. dollar index (.DXY), which measures the greenback against a basket of six major currencies, is up 4.6% this year and stands near its highest levels since early November. The index rose 1.7% last week, its biggest weekly gain since September 2022.

A rally in the U.S. dollar is accelerating, as stubborn inflation sows doubts over how aggressively the Federal Reserve will be able to cut rates this year compared to other central banks.

The U.S. dollar index (.DXY), which measures the greenback against a basket of six major currencies, is up 4.6% this year and stands near its highest levels since early November. The index rose 1.7% last week, its biggest weekly gain since September 2022.

The greenback is advancing as market participants grow convinced the Fed will need to leave interest rates at current levels for longer to avoid a potential resurgence of inflation. Last week's stronger-than-expected consumer price data bolstered that view: investors late Friday were pricing in just 50 basis points of interest rate cuts in 2024, futures markets showed, compared to 150 basis points priced in at the start of the year.

By contrast, investors believe some global central banks - including the European Central Bank, the Bank of Canada and Sweden's Riksbank - could have a freer hand to ease monetary policy. That is a shift from a few months ago, when many believed the Fed would be among the first to cut rates.

"We had a fairly clear path that the Fed would likely be the first actor. The data that we have received really does undermine that,” said Eric Leve, chief investment officer at wealth and investment management firm Bailard. “I can see obvious reasons why the dollar could strengthen further.

Yield differentials between the U.S. and other economies have widened in recent weeks, contributing to the greenback’s rally as higher yields boost the allure of dollar-denominated assets. The two-year U.S.-German bond spread stood at its widest since 2022 late Friday, LSEG data showed, a day after the European Central Bank signaled it could cut rates as soon as June.

Bullish investors have increased their bets on the dollar, while bears have wavered. Net bets on the dollar in futures markets stood at $17.74 billion in the latest week, data from the Commodity Futures Trading Commission showed, the highest level since August 2022.

Central bank policy has diverged in recent months, reflecting economies' varying struggles to contain inflation.

The Swiss National Bank reduced rates by 25 bps in March, its first cut in nine years. Sweden's central bank has signaled it could cut rates in May if inflation keeps falling, while the Bank of Canada recently suggested it was ready to ease.

Central banks in Australia, Britain and Norway, on the other hand, appear less eager to loosen monetary policy.