Dollar holds firm as markets brace for fresh Fed signals

Hawkish Fed bets support the dollar

The US dollar traded higher against most of its major counterparts on Monday, losing some ground only against the Swiss franc and the Australian dollar. Today, the greenback is extending gains against the yen and underperforming against the kiwi, but it is holding virtually unchanged against the others.

Despite the latest pullback in oil prices amid hopes of deescalation in the Middle East, the dollar held strong as last week’s hawkish hike by the Fed satisfied the market’s elevated rate hike expectations.

According to Fed funds futures, there is a strong 58% chance of a back-to-back hike in October, while such a move is more than fully priced in for December. By the end of 2027, the market anticipates a total of 80bps worth of rate increases.

Fed’s Jefferson and Williams take the rostrum

With all this hawkishness baked into the cake, investors are likely eagerly awaiting speeches by Fed Vice Chair Philip Jefferson and New York Fed President John Williams, who will both speak later today at the US Treasury Market Conference.

Around three weeks ago, Williams said that it was unclear whether the current policy was sufficient to bring inflation to target, while Jefferson’s latest remarks were about persistent inflation likely warranting a policy reconsideration. Therefore, should both officials support the view of more rate hikes down the road, the dollar is likely to strengthen more.

Yen slides despite BoJ hike and rate-check speculation

The yen has remained on the back foot even after the BoJ raised interest rates last week, and notwithstanding speculation about fresh rate checks near the 157.50 level. It seems that the two members who dissented last week’s rate hike decision raised question marks again about whether the BoJ could rise to the occasion and appear as hawkish as anticipated by the markets.

After all, the two dissenters were the officials appointed by PM Takaichi, who is a supporter of low interest rates and massive fiscal spending. During the summer of 2027, the term of two ultra hawks will expire and thus, there is a chance of two more doves entering the board. This makes it very difficult for market expectations of 100bps worth of hikes by the end of 2027 to be satisfied.

RBA Gov. Bullock sounds hawkish

The aussie strengthened on Monday but failed to extend those gains on Tuesday after RBA Governor Michele Bullock noted that upside risks to inflation may be materializing amid elevated energy prices and excess demand at home. Her comments followed remarks by RBA Assistant Governor Sarah Hunter, who earlier in the day said that rates may need to rise for a fourth time this year to ensure inflation control.

Despite the aussie not capitalizing on those remarks, Australia’s Overnight Index Swaps (OIS) market is pointing to a 95% chance of a rate hike at next week’s RBA gathering.

Stocks rally amid AI optimism, oil awaits US-Iran headlines

On Wall Street, all three indices rallied on Monday, with the tech-heavy Nasdaq 100 gaining more than 2%. Meta was the main gainer on Monday, rallying more than 11% on optimism regarding its recently released Muse AI agent.  Gains in Meta spilled over into other tech stocks, while chipmakers also benefited from renewed AI demand. AMD surged around 10%, briefly pushing its market value above $1 trillion.

The pullback in oil prices amid hopes about new US-Iran peace talks may have also helped risk sentiment. However, oil prices are on the rise again today, ahead of the UN General Assembly (UNGA) in New York. US President Donald Trump has said he would be open to meeting his Iranian counterpart, and thus, investors may have adopted a more cautious stance ahead of any important headlines coming out of the event.