The U.S. dollar rose to its highest level since late July against a basket of currencies Wednesday as markets bet on the Federal Reserve raising interest rates further.
The Fed lifted rates by 25 basis points last week and pointed to at least one further increase this year, strengthening the dollar as market rate-hike expectations continue to rise.
The dollar was also supported by a renewed rise in energy prices in Europe's afternoon trade, with Brent crude rising back above $100 a barrel. Higher energy prices are positive for the dollar due to its safe-haven status and America's position as a net oil exporter, although it has become less sensitive to moves in oil prices as rate expectations dominate.
The dollar has extended gains since the Fed's decision, taking the DXY index--which measures the dollar's value against a basket of currencies--to an eight-week high of 100.967 in European afternoon trade. The euro hit an eight-week low of $1.1397, while sterling slumped to a 12-week low of $1.3260 as rate differentials shifted in the dollar's favor.
"The dollar strength that we have been forecasting for the medium to long term may finally be here," Standard Chartered strategist Steve Englander said in a note.
The Fed's rate hike last week seems to have removed one of the market's major deterrents to buying the dollar--the fear that the Fed under Chairman Kevin Warsh would keep rates unchanged due to pressure from President Trump for lower rates.
That seems to have unwound some, but not all, of the risk premium that had been built into the dollar since the Treasury announced increased buybacks of long-term debt in mid-August, he said.
U.S. money markets on Wednesday assigned a 55% chance of the Fed delivering another 25 basis-point rate increase in October. A quarter-point hike was fully priced by December and more than three such increases were priced by September 2027, according to LSEG data.
Richmond Fed President Thomas Barkin and Boston Fed President Susan Collins on Tuesday joined a chorus of policymakers indicating more rate rises were possible. Fed officials Austan Goolsbee and Alberto Musalem also appeared to endorse the prospect of further interest-rate increases in comments earlier in the week.
"With Fed credibility on an upswing, we believe the FX market will increasingly look to other currency vulnerabilities beyond the U.S.," HSBC strategist Daragh Maher said in a note.
HSBC favors a stronger dollar against sterling given U.K. fiscal risks ahead of October's U.K. budget and the Bank of England's cautious stance on raising rates, he said.
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