The Dollar held near a seven-week high on Thursday after the Federal Reserve raised interest rates and signalled that further increases could be on the way in the months ahead.
Attention is now turning to how policymakers in the UK and Japan will respond to persistent inflationary pressures.
The US currency surged alongside Treasury yields after newly appointed Fed Chair Kevin Warsh backed a unanimous decision to raise rates. Fed officials also reinforced their hawkish stance, with projections pointing to another rate increase before the end of 2026.
Warsh struck a more hawkish tone than markets had anticipated, while his guidance on the prospect of additional rate increases caught traders off guard, Reuters reports. This prompted investors to reassess the outlook for monetary policy, driving expectations for higher rates and, in turn, lifting the Dollar.
The greenback’s rally dragged the Euro down to $1.1463, close to a seven-week low, while Sterling was little changed at $1.3372 ahead of the Bank of England’s policy meeting later on Thursday.
The Japanese Yen also remained under pressure, hovering around a two-week low at 155.98 per Dollar as traders looked ahead to the Bank of Japan’s (BOJ) interest rate decision on Friday.
Meanwhile, the Dollar index, which tracks the greenback against a basket of major currencies, stood at 100.3, close to its highest level since 31st July.
Treasury yield curves flattened sharply following the Fed’s decision, with yields on rate-sensitive two-year notes remaining at their highest level since 2024, at 4.7153%. Whereas yields on benchmark 10-year Treasuries slipped to just below the key 5% threshold.
Interest rate futures are now pricing in roughly a 90% chance of the Federal Reserve delivering another 25-basis-point rate hike before the end of the year, according to CME Group’s FedWatch Tool.
Markets will next focus on the Bank of England (BoE), which is widely expected to leave rates unchanged on Thursday. However, investors will be closely monitoring policymakers’ comments for any indication that rising energy prices could prompt the central bank to tighten monetary policy further.
Japan’s central bank is expected to raise interest rates to their highest level in 31 years on Friday, while signalling that more increases could follow as it joins other major central banks in tackling persistent inflation fuelled by soaring oil prices.
Investors will also be watching closely for any guidance from BOJ Governor Kazuo Ueda on the timing and pace of future rate hikes.