Dollar at strongest level in almost 18 months after September U.S. inflation data

The dollar gained ground to its strongest level in more than a year after the release of U.S. inflation data showing that consumer prices rose in September at their fastest pace in five months, driven by higher gasoline and energy costs, Bloomberg reported. The reading prompted traders to increase bets on further tightening by the Fed.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against a basket of global currencies, rose 0.5% on Wednesday to its highest level since May 2025. The dollar is now rising for a fifth consecutive week, gaining almost 3.5% over that period in its longest winning streak since early 2025, Bloomberg notes. All other Group of 10 major currencies weakened against the dollar on Wednesday, with the euro falling 0.7%, extending its weakness since the start of October.

The dollar’s rally has been fueled by traders’ interest rate expectations since the Fed raised borrowing costs in September for the first time in three years. Markets are now pricing in around two Fed rate hikes by the end of January, including roughly even odds of another increase as soon as the October 28 decision.

Rising expectations of another Fed rate hike in the near term supported the dollar on Wednesday. The greenback also strengthened amid a selloff in U.S. Treasuries, with falling bond prices pushing yields higher across maturities.

A widening interest rate gap between the U.S. and other countries is favoring the dollar, prompting many Wall Street strategists to rethink their outlook for the currency, Bloomberg reported. Speculative traders increased their long dollar positions to more than $35 billion in the week ended October 6, according to Commodity Futures Trading Commission data.

“Pricing for the October Fed meeting has swung quickly back,” said BofA strategist Alex Cohen, referring to traders having priced in a small chance of an October Fed rate hike before the inflation release. Meanwhile, Andrew Hazlett, a foreign-exchange trader at Monex, points out that "hotter than expected CPI has given a boost to the dollar this morning as traders price in further tightening from the Fed."

Elevated oil prices due to the ongoing conflict in the Middle East, combined with mounting concerns about fiscal and political risks in France, have boosted demand for the safe-haven dollar. The war with Iran is also pushing bond yields higher worldwide. While central banks in other major economies are also preparing to raise interest rates to tame inflation, not all economies can withstand rate increases on the same scale as those in the U.S., Bloomberg notes.