US Dollar Hits 7-Week High on Hawkish Fed as Focus Shifts to BoJ

The U.S. dollar climbed to a seven-week peak on September 17, after the Federal Reserve raised interest rates and reaffirmed its commitment to curbing inflation, according to reports from Reuters and CNBC. The dollar index reached 100.36, its strongest level since July 31, before easing slightly as energy prices extended their losses on diminishing fears of supply disruptions.

Federal Reserve Chair Kevin Warsh reaffirmed the central bank’s independence during the announcement, pushing back against repeated calls from U.S. President Donald Trump for lower borrowing costs, as reported by Reuters and CNBC. According to Commerzbank strategist Michael Pfister, American assets could have faced headwinds without clear Fed guidance because concerns about Warsh’s perceived dovish stance might have fueled doubts regarding the central bank’s inflation commitment.

The greatest danger for the U.S. dollar lies in the U.S. president increasing pressure on the Fed again in the coming weeks, which could lead to renewed doubts about the Fed’s independence, Pfister said, as cited by Reuters and CNBC. However, the Fed itself did its best yesterday to dispel these doubts.

Market Pricing and Divergence From Fed Projections

Financial markets remain far more hawkish than the monetary policy projections issued by central bank officials. While policymakers project just one more rate hike in 2026 and a hold in 2027, investors are actively pricing in more than one additional increase this year and roughly three more rate hikes by the end of 2027, according to Reuters and CNBC reporting.

The Federal Reserve’s latest meeting signaled a clear intention to recalibrate monetary policy toward a more persuasively restrictive stance. James Egelhof, chief U.S. economist at BNP Paribas, noted to Reuters that Warsh’s commentary implied the current stance was meaningfully stimulative, creating upside risk to the length and size of the current hiking cycle.

Oil Price Declines and Foreign Exchange Impact

The greenback later relinquished some of its gains as oil prices extended their decline on September 17, driven by reports that Saudi Arabia was offering extra crude cargoes through Oman, according to Reuters and CNBC. Because the U.S. economy is less exposed to energy shocks than many other major economies, the dollar typically benefits from higher oil prices by attracting foreign demand at the expense of currencies like the euro and the yen.

On Wednesday, President Trump stated that he hoped an end to the U.S.-Israeli war on Iran was near, while separate media reports indicated he was expected to meet Gulf leaders on the sidelines of the United Nations General Assembly on Tuesday to discuss the ongoing conflict, as detailed by Reuters and CNBC.

Following the energy price drop, the dollar index traded down 0.10% at 100.20 according to Reuters, while CNBC reported it down 0.16% at 100.13. Meanwhile, the euro rose 0.10% to $1.1475 in Reuters data, and 0.14% to $1.1481 according to CNBC, recovering after touching $1.1456, its lowest point in seven weeks. Sterling dropped slightly against both the dollar and the euro after the Bank of England held interest rates unchanged but warned that prolonged Middle East conflict might require tighter policy, leaving the British currency down 0.10% at $1.3366 in Reuters tracking.

Bank of Japan Focus and Policy Outlook

Market attention has now turned toward Tokyo, where the Bank of Japan is widely expected to raise interest rates to a 31-year high on Friday and signal readiness to continue pushing up borrowing costs, according to Reuters and CNBC. Chief Cabinet Secretary Minoru Kihara stated that Japan will continue striving to maintain orderly yen movements through close communication with the United States.

Investors are closely watching for any hints from Bank of Japan Governor Kazuo Ueda regarding the timing and pace of future rate increases. Mizuho expects the Japanese central bank to normalize policy at a slower pace than current market pricing anticipates, projecting that rates will reach 1.75% by mid-2027, as reported by Reuters and CNBC.

The dollar/yen exchange rate dropped 0.43% to 155.65 according to Reuters, and 0.41% to 155.68 according to CNBC. Market participants are also monitoring potential portfolio shifts by Japan’s Government Pension Investment Fund to determine whether rising domestic yields will trigger repatriation flows.