The dollar posted its strongest weekly advance since June, with the Bloomberg Dollar Spot Index rising 0.3% over three days, marking its best three-day rally since June. This surge was primarily attributed to the Federal Reserve's decision to raise the benchmark federal funds rate by a quarter point to a range of 3.75% to 4.00%, along with projections for another rate hike in 2026. The DXY, which tracks the dollar against a basket of currencies, rose above 100.00 for the first time since early August, reaching around 100.44 on Friday, near its late-July high.
The dollar's strength was further amplified by policy divergences with other major central banks. The Bank of England (BoE) held its rates at 3.75%, opting for patience despite inflation concerns and paring back market expectations for aggressive tightening. Similarly, the Bank of Japan's (BoJ) recent rate hike, though its first since 2023, was met with investor disappointment due to a split vote and cautious assessment from Governor Ueda, which preserved a wide US-Japan rate differential and sent USD/JPY through 158.
This widening policy gap left the Canadian dollar weakening beyond 1.40 per US dollar for the first time since early August, as higher US rate expectations outweighed the Bank of Canada's inflation concerns. The US-Canada two-year spread widened to a cycle high near 140 basis points. Markets are now pricing in an 80% probability of a November BoE hike and a 95% probability of a fourth Fed rate hike next month, underscoring the sustained hawkish outlook for the dollar. Gold's resilience despite higher US rates, however, suggests that fiscal and inflation concerns continue to temper enthusiasm for the dollar.
