Dollar strengthens to April 2025 high amid bets for a December Fed rate hike

The ICE U.S. Dollar Index, which tracks the dollar against a basket of major currencies, rose to 102.9 on Wednesday, its highest level since April 2025, the Wall Street Journal reports. The dollar strengthened 0.6% against both the euro and the yen after October U.S. inflation data and remarks from Fed officials bolstered expectations for a December rate hike. The euro weakened to $1.1082, its lowest level since May 2025, according to LSEG data.

U.S. consumer prices rose 0.4% month over month in October, more than markets had expected. Core prices, which exclude volatile food and energy prices, were up 0.3%. Before the print, Fed Governor Christopher Waller suggested considering a 50-basis-point rate hike at the next meeting if core inflation reached 0.3%.

On Wednesday, money markets priced in an 88% chance of a 25-basis-point hike in December and a 12% chance of a 50-basis-point move, according to LSEG data. Deutsche Bank economists expect the Fed to raise rates by 25 basis points at each of its next three meetings, in December, January, and March.

“With a December hike already the base case, further dollar gains may require stronger bets on a half-point move,” reckons Bas Kooijman, an asset manager at DHF Capital. A hot reading in Friday’s producer price index or further hawkish remarks from Fed officials could push bond yields higher and strengthen the dollar, he said. Softer economic data or a 25-basis-point hike could erase some of the dollar’s gains, he added.

The dollar is likely to stay strong in the near term as markets expect the Fed to tighten policy further, argues Chris Turner, ING’s global head of markets. “Given what could be an accelerating U.S. labor market, core inflation well above target and a Fed ready to pull the trigger again, we expect the dollar to stay strong and explore the top end of trading ranges over the coming weeks,” the WSJ quoted Turner as saying.

Markets price in a 78% chance that the European Central Bank will raise rates by 25 basis points at its December meeting. Rabobank currency strategist Jane Foley thinks the ECB may be reluctant to raise rates further after December, the WSJ reports. She said the central bank’s latest press conference suggested that its governing council was growing more concerned about the outlook for economic growth. Uncertainty over whether a far-right candidate could win next year’s French presidential election and what that would mean for cooperation within the EU could put further pressure on the euro in the coming months, Foley said. Rabobank expects the euro to weaken to $1.10 within three months.