Dollar Soars as Fed Hikes Rates and Signals More to Come

The dollar index (DXY00) rallied to a 1.5-month high on Wednesday and finished up by +0.64%. The dollar found support Wednesday on signs of US economic growth after Aug retail sales rose more than expected. The dollar raced to its high Wednesday afternoon after the FOMC raised interest rates by 25 bp and signaled another rate hike by the end of the year. The dollar also found support after the FOMC raised its US 2026 GDP forecast and its core inflation estimate.

US Aug retail sales rose +1.2% m/m, stronger than expectations of +0.8% m/m and the biggest increase in 5 months. Aug retail sales ex-autos rose +1.4% m/m, stronger than expectations of +0.6% m/m.

The US Aug import price index ex-petroleum rose +0.8% m/m, stronger than expectations of +0.3% m/m.

The US Sep NAHB housing market index fell -3 to match a 3.75-year low of 32, weaker than expectations of 34.

The FOMC, as expected, raised the fed funds target range by 25 bp to 3.75%-4.00% and said the rate hike will support a "timelier" return to 2% inflation. The committee added that, "While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient, productivity growth is strong, and capital investment is robust."

The FOMC's dot plot of rate projections shows the median year-end projection for the federal funds rate at 4.125%, up from 3.750% in June, with 16 of 18 officials expecting to raise interest rates at least once more by year-end.

The FOMC raised its 2026 GDP forecast to 2.3%, compared to 2.2% in June, and raised its 2026 core inflation estimate to 3.4% by the end of 2026, up from 3.3% forecast in June.

Fed Chair Warsh said today's decision to raise interest rates was to "remove a dose of accommodation." He added that inflation is too high and has been for too long, as too many inflation categories are still rising more than 3%.

Markets are pricing in a 57% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28.

EUR/USD (^EURUSD) tumbled to a 1.5-month low on Wednesday and finished down by -0.68%. The dollar's strength pressured the euro on Wednesday after the FOMC raised interest rates by 25 bp and signaled another 25 bp rate hike later this year.