Dollar Rises as Fed Rate Hike Expectations Meet Inflation Pressures
The rise in nominal yields reflects high real returns and persistent inflation concerns, attracting capital to the United States. This has also raised borrowing costs elsewhere, making expensive equity valuations less appealing.
The Federal Reserve's interest rate hike expectations are supporting the US dollar, but other central banks face similar inflation pressures. The European Central Bank (ECB) raised its deposit and refinancing rates to 2.50% and 2.65%, respectively, with an expected inflation rate of 3.0% in 2026 and only 0.9% growth.
The Bank of England (BoE), however, took a different approach, holding the interest rate at 3.75%. Three dissenting members wanted to increase it to 4.00%, citing concerns about another energy shock pushing inflation above 4% in early 2027.
In Asia, the Bank of Japan raised its overnight rate to 1.25% on September 18 due to increased risk of inflation from energy prices, wages, and yen weakness. In contrast, China has kept its one-year loan prime rate at 3.00%, despite consumer inflation being only 0.8% in August.