The U.S. currency is experiencing its best month since June, following the Fed’s renewed focus on curbing inflation, which has boosted rate expectations and U.S. Treasury yields.
Stronger-than-expected U.S. economic data and rising inflation risks have bolstered the dollar. Ongoing tensions in Iran have kept energy prices elevated, pushing U.S. Treasury yields to historic highs, with the 30-year yield reaching its highest level since 2002.
Markets currently expect the Fed to raise interest rates by nearly one percentage point over the next 12 months, which would further strengthen the dollar.
“U.S. economic data continues to guide the dollar’s trajectory,” said Jayati Baldevraj, head of foreign exchange strategy at TD Securities. “Surprises in U.S. data serve as directional signals for short-term dollar movements and determine whether the Fed can tighten policy as markets expect.”
On Tuesday, Federal Reserve Governor Michael Barr reiterated his warning that additional rate hikes may be needed to bring inflation under control. Similarly, New York Fed President John Williams stated that another rate increase later this year might be appropriate to help inflation return to target more promptly.
Expanding interest rate differentials and robust U.S. economic growth are also prompting dollar bears to reconsider their positions. Morgan Stanley recently abandoned its long-held view that the dollar would weaken in the second half of 2026.
Kamakshya Trivedi, global head of foreign exchange and interest rate forecasts at Goldman Sachs, expects the dollar to trade within its current range and predicts only one more rate hike by the Fed in October.
Traders are closely watching Friday’s September jobs report, which will test market expectations for aggressive monetary tightening. Additionally, the U.S. will release its August personal consumption expenditure (PCE) price index on Wednesday—the Fed’s preferred inflation gauge.
