Dollar Rally Builds as Hawkish Fed Meeting Stokes Rate-Hike Bets

98ezlgawemee4{jug2frd8xu_media_dl_1.png Bloomberg

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(Bloomberg) — The dollar extended its rally for a second day, pushing it back toward the late-March peak, as traders piled into bets that the Federal Reserve will start raising interest rates as soon as late next month.

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The advance pushed the Bloomberg Dollar Spot Index roughly 1% above where it was ahead of Wednesday’s Fed meeting, when Chairman Kevin Warsh emphasized the central bank’s inflation-fighting role and forecasts showed many policymakers anticipate increasing rates before the end of the year. 

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As that pushed up short-term Treasury yields sharply, global investors were given a renewed incentive to shift money into US assets. The euro dropped to the lowest since March, the Canadian dollar hit a seven-month low and the yen slid to its weakest since July 2024.

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The message from the Fed provided a renewed boost to the dollar, which had benefitted from its status as a haven when the Iran war sent oil prices surging. 

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“The Fed’s hawkish policy update is threatening to trigger a bullish break out for the US dollar, more than offsetting the dampening impact from the US-Iran deal,” said Lee Hardman, a strategist at MUFG Bank Ltd.

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The US-Iran peace agreement is now shifting attention back to the strength of the underlying US economy as oil prices retreat. And that has continued to remain relatively strong, in part due to the surge of spending on artificial intelligence, while inflation recently accelerated to a three-year high of roughly twice the Fed’s 2% target. 

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Bond traders rapidly priced in that the Fed is likely to raise rates by a quarter-percentage point at its September meeting — with some chance seen of a move as soon as next month —- and follow with another before the year ends. That’s pushing US yields further above those in many other countries, giving investors an incentive to buy dollar-denominated assets. 

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The Fed meeting “was unambiguously hawkish and thus unambiguously dollar positive,” said Alex Cohen, a foreign-exchange strategist at Bank of America Corp.

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What Bloomberg Strategists Say…

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“Expectations of a dovish leaning Federal Reserve have been acting as a constraint on the dollar. That narrative is rapidly unraveling after the latest FOMC meeting and, as markets move beyond Iran and refocus on the data, the dollar will strengthen.”

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-Skylar Montgomery Koning, Macro Strategist. For the full post, click here.

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Ugo Lancioni, senior portfolio manager at Neuberger, which oversees $576 billion, said that while the firm remains bearish on the greenback in the medium-term, given its expensive valuation, “the strength of US macro data, inflationary pressures related to the energy shock and the investment cycle in AI continue to support the dollar.”

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Hedge funds, asset managers and other speculators held $27.8 billion worth of bullish dollar positions as of June 9, the most since February 2025, Commodity Futures Trading Commission data compiled by Bloomberg show. The next reading of speculative positioning is scheduled to be released on Monday.

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The Fed meeting has “revitalized” dollar bulls, said Jane Foley, the head of currency strategy at Rabobank. 

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