Hawkish Fed lifts dollar to seven-week high as focus turns to BOJ

The dollar clung to a seven-week high on Thursday after the Federal Reserve raised interest rates and flagged more hikes in coming months, while investors awaited decisions from the Bank of England later and the Bank of Japan on Friday.

The dollar ripped higher alongside US Treasury yields, after new central bank chief Kevin Warsh joined a unanimous decision to hike interest rates, while officials validated a hawkish path and projected one more increase in 2026.

“(Warsh) definitely sounded more hawkish than expected, and the fact that he provided guidance on future hikes surprised the markets, causing them to reprice policy higher, which ultimately pushed the dollar higher,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.

“Our outlook is for the dollar to appreciate because of our view on the FOMC.”

The dollar’s strength pushed the euro to US$1.1456, near a seven-week low, while sterling was flat at US$1.3377 ahead of the Bank of England’s meeting later on Thursday.

At 156.20 per dollar, the yen hovered near a two-week low as markets awaited the Bank of Japan’s decision on Friday.

The dollar index, which measures the greenback against a basket of currencies, last traded at 100.33, the strongest level since July 31.

The Australian dollar fetched US$0.7096, and the kiwi traded flat at US$0.5713.

Rate futures markets now reflect about a 90% probability of a follow-up quarter-percentage-point Fed rate hike by the end of this year, according to CME Group’s FedWatch Tool.

BOJ next to watch

Attention is now firmly on the Bank of Japan, which is expected to raise interest rates to a 31-year high on Friday and signal its readiness to keep pushing up borrowing costs, joining other major central banks in fighting persistent inflation pressures driven by soaring oil costs.

Markets will also focus on any hints BOJ governor Kazuo Ueda gives on the timing and pace of any further increase.

“The bigger question is how governor Ueda frames the path beyond September, particularly whether the BOJ signals a faster pace of normalisation amid still-elevated inflation,” analysts at OCBC said in a note.

That could be a key test for the yen, which jumped to a seven-month high against the dollar last week as speculative positions flipped to net-long bets on growing conviction in the Bank of Japan’s policy-tightening path. Japanese retail investors have maintained stubborn short positions, though, expecting that the yen’s recent gains would be short-lived.

In cryptocurrencies, bitcoin was flat at US$76,562.25.

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