Dollar Surges to 4-Month High as Fed Hikes Loom

The US dollar index (DXY) reached a 1.75-month high on Friday, driven by signs of a strengthening US economy and hawkish comments from Fed officials. The OECD raised its 2026 GDP forecast for the US to 2.2%, up from 2.0% in June, while also lowering its inflation forecast to 3.6%. This shift in expectations has market participants pricing in a higher chance of further monetary policy tightening by the Federal Reserve.

Fed Governor Michael Barr said that 'further policy adjustments by the Fed are likely to be needed to ensure inflation comes down to target in a timely fashion.' This sentiment is echoed in the latest S&P manufacturing PMI, which unexpectedly rose 3.1 points to 57.0, the fastest pace of expansion in 4.25 years.

The dollar's strength has also weighed on other currencies, with the euro (EUR/USD) up by 0.58% and the yen reaching a 2.5-week low against the dollar. However, precious metals prices have also been impacted, with gold and silver down due to the hawkish central bank comments.