Dollar Breaks Above 100 as Hawkish Fed Signals Boost Expectations

The US Dollar Index has regained buying support and broken above 100 after two consecutive days of declines, driven by hawkish signals from the Federal Reserve. The market's repricing of the US interest rate trajectory has become a primary driver keeping the dollar at elevated levels.

Following the Fed's September 16 decision to raise the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, its policy statement continued to emphasize that inflation remains persistently high. According to projections from the Federal Reserve, most officials anticipate further room for rate hikes this year.

The market-implied probability of another rate hike in October is approximately 56.5%, up from around 42.5% a week earlier, as indicated by the CME FedWatch Tool. This suggests that the dollar is supported not merely by short-term interest rates but also by expectations for higher interest rates to persist.

Federal Reserve Chair Kevin Warsh noted that US inflation remains excessively high and has persisted for too long, while Minneapolis Fed President Neel Kashkari stated that US inflationary pressures are widespread across multiple sectors of the economy. The resilience of the US economy, productivity, and labor market also contribute to the Federal Reserve's hawkish stance.

The interest rate differential between the US and Japan remains a key support factor for the dollar, with the Bank of Japan raising its policy rate by 25 basis points to 1.25% last week. However, the yen subsequently weakened, allowing the US Dollar Index to find some support near the 100 level.