The Dollar Just Hit a Six-Week High as the Fed Out-Hawked the World

The clearest winner from this week's central-bank action was the US dollar. The dollar index rose to around 100.4 on Friday, its highest level in about six weeks, as the Federal Reserve's rate hike and hawkish projections drew money toward the currency. When the Fed signals higher rates for longer, the dollar tends to strengthen.

The divergence with other central banks is doing the work. The Fed is now clearly the most hawkish of the major central banks, and even after the Bank of Japan raised its own rate, the yen still fell against the dollar, while the euro and pound weakened too. Money flows toward the highest and rising yield, and right now that is the dollar.

The reach of a strong dollar is wide. Because commodities and many assets are priced in dollars, a stronger greenback makes gold more expensive for foreign buyers, pressures cryptocurrencies, and squeezes emerging-market economies that borrow in dollars. The dollar is the tide that moves a lot of other boats.

The rate outlook is feeding the move. Traders now put the odds of another Fed hike at the October meeting near 53 percent, up from about 44 percent a day earlier, so the market is leaning toward more tightening, which keeps upward pressure on the currency. Expectations of the next hike matter as much as the last one.

The caution is that dollar strength can overshoot and reverse. If US data weakens or the Fed softens its tone, the currency could give back gains quickly, and a very strong dollar also creates problems the Fed itself may not want, so this is a trend to watch rather than a one-way certainty. Currencies turn when the rate story turns.

So the dollar has emerged as the scoreboard for a Fed that is tightening while others hesitate, and its climb is rippling across every market priced against it. Near 100.4, six-week high, October in view. The Fed out-hawked the world this week, and the dollar is the scoreboard. As long as it keeps climbing, gold, crypto and everything priced against it feel the squeeze.