US Dollar: Hawkish Fed supports Dollar against Euro - Danske Bank
Danske Research Team explains that the Dollar strengthened after the Fed’s unanimous 25bp rate hike and hawkish risk assessment, which emphasized upside inflation risks.
The US Dollar experienced a strengthening trend following the Federal Reserve's unanimous 25 basis point rate increase and a hawkish risk assessment. This assessment emphasized potential upside risks for inflation. The market reacted positively to this news, with the Dollar rising alongside short-term US Treasury yields. Strong August retail sales data further supported the perception of robust US economic growth and accommodative monetary policy.
At the Federal Reserve, Chair Jerome H. Powell spoke about the decision, highlighting that the Committee still views monetary policy as accommodating for growth. The 2026 dot indicated a single additional rate hike, aligning with expectations, while the 2027 median signaled no further tightening. However, eight participants still foresaw a rise in rates to 4.25-4.50 percent, consistent with the team's expectations.
The statement remained largely unchanged, with only a minor addition noting the resilience of domestic spending. There were no modifications to the balance sheet policy as anticipated. The risk assessment adopted a hawkish stance, as no participants now perceived risks toward weaker GDP growth or labor markets, enabling the Fed to concentrate more on upside inflation risks. Nearly all participants continued to emphasize this aspect.
As a result, the EUR/USD pair declined significantly below 1.15 following the hawkish Fed decision. Moreover, the US Treasury yields surged, with the 2-year and 10-year swaps increasing by 10 and 6 basis points, respectively. Similarly, EUR/USD experienced a modest decline, consistent with the hawkish interpretation.
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