Dollar Holds Near Multi-Week Highs Ahead of Fed Decision

The US dollar is trading near multi-week highs on several major peers ahead of the Federal Reserve's decision, which traders expect to be the first of multiple interest rate hikes. According to Carol Kong, currency strategist at Commonwealth Bank of Australia, a 25-basis-point increase is about 90% priced, implying the dollar will receive a modest boost if the Fed increases.

The dollar has been gaining traction in recent sessions due to expectations that despite Chair Kevin Warsh's appointment to cut interest rates, he'll need to hike a few times to show the Fed is serious about taming inflation fueled by the war with Iran and energy price surge. Calvin Tse, head of US strategy and economics at BNP Paribas, said they are skeptical that one or two hikes will be enough to restore the Fed's credibility.

The yen is an exception to the dollar's broad steadiness in foreign exchange markets, with traders seeing an 80% chance the Bank of Japan hikes rates on Friday. The Japanese central bank has priced in two 25-basis-point hikes by the end of January, and interest rate differentials will heavily influence the yen's path.