US Dollar Surges on Hawkish Fed Hike but Analysts See Limited Upside
The US dollar surged to a six-week high after the Federal Reserve delivered its first interest rate hike since July 2023. The Fed's unanimous decision effectively signaled another 25bp move by December, but markets are cautious about further tightening next year.
Kevin Warsh, the new Fed chair, avoided strong forward guidance due to conflicting pressures from President Trump and economic data that continues to push inflation upwards. As a result, it was unlikely that the Fed would signal multiple additional hikes at this meeting, particularly given the influence of elevated crude oil prices on the inflation outlook.
The US dollar index rose 0.7% to its highest level since May, with EUR/USD falling to a 34-day low and GBP/USD declining by 0.8%. The Fed's forecast showed that core PCE inflation for 2026 was upgraded to 3.4%, while headline PCE was increased by 0.1 percentage point to 3.7%.
Despite the near-term strength of the US dollar, many analysts suspect that the year's high is already in and that the broader rebound is corrective. The weekly RSI for the DXY is not yet overbought, but price action on the chart suggests that the rally from January may be coming to an end.