Federal Reserve signals continued interest rate hikes, dollar posts largest weekly gain in over three months.

After the Federal Reserve signaled it will continue raising interest rates in the future, the dollar strengthened significantly this week, posting its largest weekly gain in more than three months. Strong U.S. economic growth and the Fed's persistent policy stance of fighting inflation provided important support for the dollar. The Bloomberg Dollar Spot Index rose 1.1% this week. This week, the Fed implemented its first rate hike in more than three years and signaled that further monetary policy tightening may still lie ahead. JPMorgan, Standard Chartered and Brown Brothers Harriman believe this policy action removed an important factor that had previously constrained further dollar gains. From a technical perspective, the Bloomberg Dollar Spot Index fluctuated around its 200-day moving average on Wednesday and Thursday, and closed slightly above this key technical level on Friday. Historical price action shows that after the dollar index effectively breaks above its 200-day moving average on a daily basis, further gains often follow. In March and June of this year, the index saw subsequent rallies after breaking above its 200-day moving average. The dollar had also been on track for its largest weekly gain since the outbreak of the Iran war in March, but its advance narrowed as the yen recovered some ground on Friday. This followed reports that the Bank of Japan conducted a rate check, a move typically seen by the market as a precursor to possible official foreign exchange intervention by Japanese authorities. Steve Englander, co-head of FX research and head of North America macro strategy at Standard Chartered in New York, said the 25-basis-point rate hike appeared to have eliminated a major concern that had previously made the market reluctant to buy dollars, namely investor worries that Fed Chair Warsh might avoid raising rates because of President Trump's position. Englander believes the rate hike not only weakened concerns about going long the dollar, but also increased the risk of shorting the dollar. He expects that with the U.S. 10-year Treasury yield potentially rising to 5.5% over the next 12 months, the path for further dollar strength has become clearer. It is worth noting that before this week's Fed rate decision, speculative FX investors, including asset managers and non-commercial traders, had been reducing long dollar positions for some time. According to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday and compiled by Bloomberg, bullish dollar positions had fallen for a seventh consecutive week in the week ended September 15. Still, the market remains divided over whether the dollar can break through this year's high. Elias Haddad, head of global market strategy at Brown Brothers Harriman, said other major central banks are also tightening monetary policy, which limits the room for further monetary policy divergence between the United States and other economies, so the dollar may struggle to set a new cyclical high. Currently, the Bloomberg Dollar Spot Index is still about 1.9% below its 2026 high set on June 24. Risk reversals show options traders expect the dollar may strengthen modestly over the next month, but based on the gains implied by the options market, there is still a clear gap before the dollar index can refresh its year-to-date high. Nevertheless, the U.S. economy's growth advantage relative to other major economies may continue to support the dollar. Haddad noted that next week's September S&P Global Purchasing Managers' Index (PMI) is expected to show that U.S. economic growth is still outperforming the euro area, the United Kingdom and Japan. JPMorgan FX analyst Pat Locke, meanwhile, believes that based on multiple indicators including interest rate differentials, the dollar was undervalued by about 2% to 4% before this week's Fed meeting. As the market begins to price in the possibility of further Fed rate hikes, the dollar is undergoing a valuation "catch-up" move, with gains particularly pronounced against low-yielding currencies.