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

The dollar reached a seven-week high on Thursday after the Federal Reserve lifted interest rates and indicated further hikes in the coming months. Investors eagerly awaited decisions from the Bank of England and the Bank of Japan later in the week. Federal Reserve Chair Kevin Warsh, a key player in the unanimous decision, surprised markets with his hawkish stance and projection of additional rate increases in 2026.

This led to reevaluation of policies, pushing the dollar higher, according to Carol Kong, currency strategist at Commonwealth Bank of Australia. The euro slipped to near a seven-week low against the dollar at US$1.1456, while the British pound remained flat at US$1.3377. The yen hovered near a two-week low around 156.20 per dollar, awaiting the Bank of Japan's decision on Friday.

The dollar index traded at its strongest level since July 31, at 100.33. Rate futures markets now indicate a 90% probability of another quarter-point Fed rate hike by year-end. Attention now shifts to the Bank of Japan, which is expected to raise interest rates to a 31-year high on Friday and prepare for further cost-push inflation measures.

Analysts at OCBC emphasize the importance of BOJ Governor Kazuo Ueda's comments on the timing and pace of any future increases, which could significantly impact the yen's trajectory.