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

The US dollar reached a seven-week high on Thursday after the Federal Reserve raised interest rates and signaled additional hikes. Investors eagerly anticipated decisions from the Bank of England and the Bank of Japan later that day. The dollar surged alongside US Treasury yields following the unanimous decision of new Fed Chair Kevin Warsh to hike interest rates.

Warsh's remarks were more hawkish than anticipated, surprising markets and leading to a re-pricing of policy, which boosted the dollar's value. Analyst Carol Kong of Commonwealth Bank of Australia explained that the market's reaction was due to the FOMC's expectations of future increases. As a result, the euro weakened against the dollar to a seven-week low, while the British pound remained flat ahead of the Bank of England's meeting.

The Japanese yen experienced a two-week low at 156.20 per dollar, as traders awaited the Bank of Japan's decision on Friday. The dollar index traded at its strongest level since July 31, at 100.33. The Australian dollar reached US$0.7096, and the New Zealand dollar held steady at US$0.5713. Rate futures markets reflected a 90% probability of another quarter-percentage-point Fed rate hike by the end of the year, according to CME Group's FedWatch Tool.

Market attention then shifted to the Bank of Japan, which was expected to raise interest rates to a 31-year high on Friday, signaling its commitment to combating persistent inflation driven by high oil costs. Analysts from OCBC noted that the key question for the yen was how Governor Kazuo Ueda would frame the path beyond September, especially if he indicated a faster pace of normalization amid high inflation.

Japanese retail investors had maintained short positions, expecting the yen's recent gains to be short-lived. Bitcoin remained flat at US$76,562.25.