U.S. dollar advances to highest since May 2025 on Fed hike views

The United States dollar strengthened to the highest level in over a year as a hot U.S. inflation reading pushed traders to add to bets that the Federal Reserve will raise interest rates.

The Bloomberg Dollar Spot Index surged Wednesday past its November peak to rise 0.5 per cent and touch the highest level since May 2025. U.S. consumer prices advanced at the fastest pace in five months on rising fuel costs, according to Bureau of Labor Statistics data. Treasuries slumped, driving yields higher across maturities following the print. The greenback climbed against all of its peers in the Group of 10, with the British pound lagging nearly all — falling to the lowest in almost a year.

“Hotter than expected CPI has given a boost to the dollar this morning as traders price in further tightening from the Fed,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc.

The dollar extended its rally into a fifth week, up nearly 3.5 per cent so far in the period, its longest winning streak since early 2025. The rally has been fuelled by traders’ rate predictions since the Fed hiked rates for the first time in three years last month. The market is now pricing in nearly two Fed hikes by end of January, while boosting chances for an October raise as well.

“Pricing for the October Fed meeting has swung quickly back,” said Alex Cohen, a strategist at Bank of America. The bank said it maintained the view that the Fed will increase rates this month.

The consumer price index rose 0.6 per cent in September from a month earlier, according to BLS data out Wednesday. On an annual basis, it advanced 3.7 per cent, above the forecast of 3.6 per cent. A key measure of underlying price pressures, excluding food and energy, rose 0.3 per cent from the prior month with analysts expecting a 0.2 per cent advance.

Citigroup Inc. economists added a December rate increase to their Fed forecast based on the data but see a pause at the October meeting in about two weeks.

Traders are now awaiting Fed Chairman Kevin Warsh to comment on the inflation print and monetary policy when he speaks at the International Monetary Fund-World Bank Group annual meetings in Bangkok, Thailand, later this week.

“It is likely that Warsh reiterates that the Fed has ‘no tolerance’ for persistently elevated inflation,” said Sarah Ying, head of FX strategy at CIBC Capital Markets. “If he acknowledges broadening price pressures and reiterates the Fed’s long-term mandate, it could be interpreted as hawkish by the market.”

HSBC’s Nick Andrews and Paul Mackel said in a note that Warsh re-established credibility by raising rates in September.

“With prices still running hot, that credibility, and the prospect of firmer policy, should keep the balance of risks tilted towards a stronger dollar,” they added.

Elevated oil prices due to the ongoing war in Iran and heightened concern over fiscal and political risks in France have boosted demand for the haven currency. The war has also been lifting global yields. While central bank policymakers in other major countries are also gearing to raise borrowing costs to stem price growth, not all economies can handle the same amount of rate hikes as the U.S.

The euro dropped as much as 0.8 per cent on the day to US$1.1113, the weakest level since May of last year. The euro “could continue to bear the brunt of the dollar rally” amid clouding fiscal outlook in Europe, according to Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole.

While the yen declined as much as 0.4 per cent to trade at 158.95 per U.S. dollar on Wednesday, edging to the closely watched level of 160 where the market sees the increased risk of Japanese authorities intervening in the market.

A widening interest-rate gap is favouring the dollar, with many strategists on Wall Street rethinking their outlook for the U.S. currency. Speculative traders boosted their bullish stance on the dollar in the week through Oct. 6, holding more than US$35 billion in wagers tied to the dollar rising, Commodity Futures Trading Commission data show.