The U.S. dollar surged to a seven-week high following the Fed's interest rate decision

On September 17, the U.S. dollar held steady near the seven-week high it had reached the previous day — investors reacted to the Federal Reserve’s (Fed) rate hike, as well as the regulator’s signals regarding further tightening of U.S. monetary policy in the coming months, Reuters reports.

Against this backdrop, the dollar index—which tracks the U.S. currency’s performance against a basket of six other currencies—rose to 100.33 points, its highest level since July 31, the agency reports. The dollar’s strength pushed the euro to a level close to its seven-week low of $1.1456. Meanwhile, the Japanese yen is hovering near a two-week low of 156.2 per dollar ahead of the Bank of Japan’s interest rate decision on September 18.

“[Fed Chair Kevin Warsh, speaking at a regulatory meeting] certainly sounded more ‘hawkish’ than expected, and the fact that he provided guidance on future rate hikes surprised the markets—they reassessed [U.S.] monetary policy as being tighter, which ultimately pushed the dollar higher,” said Carol Kong, a currency strategist at the Commonwealth Bank of Australia, commenting on the market movements. “Our forecast calls for a stronger dollar—based on our view of the [future policy] of the Federal Open Market Committee,” she added.

According to the CME's FedWatch tool, markets are pricing in a roughly 90% probability of another Fed rate hike of a quarter of a percentage point by the end of this year.

The tightening of U.S. monetary policy is supporting the dollar while putting pressure on other currencies, as key commodities such as oil, natural gas, and agricultural products are priced in dollars, CNBC explains. “This is creating tension around the world,” noted Mark Zandi, chief economist at Moody’s Analytics, “especially in countries whose currencies or monetary policies are closely tied to U.S. interest rates.” One such market is Japan. A weaker yen could strengthen the case for further monetary tightening in the country, which in turn “would put pressure on [the entire Japanese] market, forcing Tokyo to follow the [Fed’s] lead and raise interest rates,” Zandi explained.

"The market's 'hawkish' interpretation of the Fed meeting 'may put some pressure on Asian currencies and bond markets in the short term,'" agreed Navin Saigal, head of BlackRock’s global fixed-income division for the Asia-Pacific region.

The weakening of national currencies could also complicate central banks’ efforts to combat inflation by raising the cost of imported goods in local currency, according to CNBC — all against the backdrop of a sharp rise in oil prices due to the conflict in the Middle East, which in some countries could lead to higher energy costs, the network notes.

Nevertheless, the resilient U.S. economy—which has allowed the Fed to tighten monetary policy—may also support export demand and corporate activity in other countries, Saigal continued: According to the analyst, strong economic growth in the U.S. should continue to stimulate global economic activity, trade flows, and corporate fundamentals in Asia, even though rising interest rates will create short-term pressure.

During trading on September 17, Asian stock indices mostly rose slightly following the Fed's decision, while long-term Treasury yields edged lower: Investors expect the central bank to be able to rein in inflation in the world’s largest economy, Reuters explained.

This article was AI-translated and verified by a human editor