Dollar hits one-year high as Fed rate hike bets intensify

The dollar index surged to its strongest level in over a year as nearly half of Fed officials now project higher rates by year-end.

The Federal Reserve held its benchmark rate at 3.50% to 3.75% Wednesday but triggered a dollar rally after nearly half of policymakers penciled in a rate hike before year-end, pushing the greenback to its highest in more than a year.

"The Fed's hawkish policy update is threatening to trigger a bullish breakout for the US dollar," said Lee Hardman, senior currency analyst at MUFG.

The ICE US Dollar Index rose 0.36% to 100.71 Thursday, the highest since May 2025, after surging 0.85% the previous session — its biggest single-day jump in over three months. The euro fell 0.3% to $1.146 and sterling dropped 0.54% to $1.322, both at their lowest in more than two months. Fed funds futures now fully price a rate hike by October, according to LSEG data, with a strong retail sales reading further reinforcing hawkish bets.

The dollar's surge threatens to tighten financial conditions globally, pressuring emerging-market currencies and risk assets, even as oil prices ease after the US and Iran signed an interim peace deal that reopens the Strait of Hormuz. The next Fed meeting in September will be watched for whether the hawkish pivot hardens into actual rate increases.

The rally marks a sharp reversal from the easing bias that dominated markets earlier this year. New Fed Chair Kevin Warsh opened his tenure with a sweeping policy review, and the updated dot plot showed nearly half of the 19 officials now expect higher rates in 2026 — a dramatic shift from the three cuts the market had priced at the start of the year.

The dollar's strength has persisted despite a decline in oil prices following the US-Iran interim agreement signed Wednesday, which ended the Iran war, reopened the Strait of Hormuz and waived US sanctions on Iranian oil. Typically, lower oil prices reduce safe-haven demand for the dollar, but the rate-hike impulse has overwhelmed that effect.

"The US dollar has derived support from the sharp adjustment higher for short-term US rates, more than offsetting the dampening impact from the US-Iran deal announcement over the weekend," Hardman said.

Cross-asset spillover

The yen bore the brunt of the dollar's ascent, weakening to 160.90 per dollar — its lowest since July 2024 and wiping out all gains made after Tokyo's intervention on April 30. The renewed slide drew an immediate response from Japanese officials.

"We are ready to respond appropriately to currency moves as needed at any time," Chief Cabinet Secretary Minoru Kihara told a press conference Thursday.

The risk-sensitive Australian dollar also weakened, falling 0.1%, while the Bank of England is expected to hold rates at 3.75% later Thursday as it assesses what the Iran truce means for inflation.

Kimmy Tong, global market and FX strategist at Everbright Securities International, said sentiment favoring a stronger dollar should continue to dominate until the Strait of Hormuz reopening is confirmed, given the Fed's tightening bias.

The last time the dollar index traded above 100 was in May 2025, preceding a period of broad emerging-market outflows. A sustained break above that level could trigger further positioning adjustments, particularly in carry trades that have relied on a weaker dollar. The CME FedWatch tool will be the key barometer for whether the market's October hike pricing holds or intensifies in the weeks ahead.

This article is for informational purposes only and does not constitute investment advice.